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Edited Transcript of ALQ.AX earnings conference call or presentation 19-Nov-19 10:30pm GMT

Half Year 2020 ALS Ltd Earnings Call

MILTON , QLD Dec 14, 2019 (Thomson StreetEvents) -- Edited Transcript of ALS Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 10:30:00pm 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

* James Redfern

BofA Merrill Lynch, Research Division - VP

* John Purtell

Macquarie Research - Analyst

* Nathan Reilly

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

* Peter Drew;Carter Bar Securities;Director

* 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, ladies and gentlemen. Welcome to the ALS Limited 1H '20 Results Conference Call. (Operator Instructions)

At this time, I would like to hand things over to Mr. Raj Naran, CEO, Managing Director of ALS. Please go ahead, sir.

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

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All right. Thank you. Good morning, and thank you for your attendance today on the call. With me is our Chief Financial Officer, Luis Damasceno; and our Head of Investor Relations, Simon Starr. I will present the highlights of our first half of fiscal year '20 financial 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 ASX release and the investor presentation of our half year results as being read, and I'll only refer to individual slides as appropriate during my commentary.

Please note that the financial results are presented in both pre and post AASP. My commentary will refer to financials, pre AASP, so results comparisons will be on a like by like basis.

As noted on Slide 4, we are pleased to announce an underlying net profit after tax of $98.2 million, exceeding our guidance range of $90 million to $95 million provided to the market at our Annual General Meeting in July 2019. The result is 5.3% higher than the prior corresponding period. This is a good result for ALS. I want to take a moment and thank our staff and management for delivery of this solid result.

Slides 4 and 5 demonstrates an overall revenue growth of 11.3% with 7.3% organic growth across all businesses compared to the prior corresponding period. This result was primarily driven by strong organic growth across all regions in the Life Sciences and the Industrial divisions, combined with some acquisition growth, including an initial contribution from ARJ, a Mexico-based pharmaceutical laboratory acquired in August 2019.

The Commodities division grew revenue by 1.9% driven by metallurgy, inspection and coal. Geochemistry sample volumes were down by 11% in the first half, resulting in a 2.9% reduction in geochemistry revenue.

On Slide 15, Life Sciences delivered a 15.4% revenue growth to $468.6 million. The division achieved a 10.2% organic growth in revenue. Underlying EBIT grew by 20.9% to $74 million, while the margin continued to expand to 15.8%, an improvement of 73 basis points compared to the first half of fiscal '19. All regions contributed to this result, which was driven by investment in greenfield opportunities, combined with a focus on business development, productivity and client service improvements, leading to growth in market share. The U.S.A. under a new management team continues to drive productivity improvements, new business wins and saw underlying EBIT margin expansion of 700 basis points compared to the prior corresponding period.

The Environmental business saw revenue increase by 15.6%, driven by strong growth in the U.S.A., Latin America and Australia due to infrastructure programs and a stable mining sector.

The Food and Pharmaceutical business delivered a revenue growth of 18.1%, primarily driven by acquisition growth. This included an initial contribution from ARJ, which delivered performance in line with expectations and is expected to continue to benefit from ALS' regional and global presence. Life Sciences continues to remain a key focus for acquisition opportunities with a strong pipeline of bolt-on opportunities in the Food and Pharmaceutical sector.

On Slide 18, the Commodities division delivered $81.4 million of underlying EBIT, despite headwinds in geochemistry. The division saw a reduction of underlying EBIT of 2.9%, with subdued equity funding for junior miners in the period, impacting geochemistry. Metallurgy saw revenue growth of 5.5% after gaining market share in Australia and Canada, while inspection had revenue growth of 14.6%. Coal delivered a revenue growth of 9.5% due to diversification of its offering in less cyclical activities, such as superintending and mine site services.

On Slide 23, the Industrial division grew underlying EBIT by 27% and delivered a 23% increase in revenue at a margin of 12.2%, an improvement of 38 basis points compared to the prior corresponding period.

For the Asset Care business, the organic growth of 23.3% was driven by an increase in maintenance-related revenue and contract wins in the U.S.A. chemical sector. Tribology saw revenue growth of 12.5%, supported by strong oil and gas and mining production environment.

Slide 26 illustrates the company's continued focus and commitment to technology and innovation across all businesses. Technology and innovation are a key focus in our strategic road map, and we have numerous examples of positive work being done at ALS in this space.

I will now turn the call over to Luis Damasceno.

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Luis Damasceno, ALS Limited - CFO [3]

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Thanks, Raj, and thank you, everyone, for joining the call this morning. I'll start by providing some highlights on the financial summary on Slide 8. The total revenue growth from continuing operations was 11.3%, of which 7.3% was organic, driven in part by the stronger revenue growth in Life Science. 1.4% was due to scope change based on net impact of acquisitions and divestments and 2.6% was linked to the currency impact. The underlying EBITDA margin from continuing operations was 16.9%, down from 17.4% in the first half of 2019 fiscal year. This decline is explained by demand reduction in the commodity division, which was partially offset by margin improvements in the Industrial division, and by chipping in the Life Sciences divisions, where margin grew by 73 basis points compared to the prior responding period.

Underlying tax expense from continuing operations was $39.3 million. This represents an effective tax rate of 28.6%, which is up from 27.3% in the same period last year. This increase is explained mainly by the change to the anti-hybrid interest deductibility rules in Australia. We expect that the group's underlying effective tax rate for the full year and fiscal year 2020 will be close to 29%.

In the discontinued operations column is reported the results of the Oil and Gas Laboratory Services business. And in the column to divestments and other business closures, which reflect a net gain of $51.7 million, mainly associated to the sale of the Environmental business in China.

Finally in the columns of restructuring and other one-off items, a total of $11.7 million at EBITDA level is presented to assist in the assessment of the relative performance of the group from period to period. Our global design, we'll monitor late in this call.

The underlying EPS from continuing operations was $0.203 per share, that's 6.3% from the prior year corresponding period.

And finally, the company declared an interim dividend $0.115 per share, with an increase of 4.5% over the interim dividend declared in the same period last year.

I'll move now to Slide 9, where we cover our free cash flow. Now please note that the numbers presented here include all the operations, both continued and discontinued operations. The company continues to deliver solid conversion EBITDA into cash from the operations. This is due to our permanent focus on capital management. The cash conversion rate in the first part of the year was 73% compared to 75% in H1 2019 and 64% in H1 2018 fiscal years. It's important to remind that due to the seasonality of the business, the second half of the year has historically delivered a higher cash conversion rates. We anticipate that the cash conversion rate will follow the usual seasonal trend this year and reach rates between 90% and 95% by the end of 2020 fiscal year. This strong cash generation allowed us to continue to invest in maintenance and growth CapEx and also to drive organic growth. The total CapEx in the first part of the year was 13% higher than the prior corresponding periods, and represented a total 5.6% of the company's total revenue compared to 5.8%, in the same period last year. In the Slide 10, you can find a breakdown of 2020 half year CapEx among the different divisions.

Now looking at the investing finance activities during the half year, I want to highlight few -- a few items here. First, the acquisition of ARJ Laboratories, which initial net payment is included in the $58.8 million acquisition line. The net proceeds from divestments of the Environmental business in China, in the total amount of $66.9 million, an additional $22 million on market share buyback, a total $4.3 billion linked to shares bought in the market to fund a tip and serves the right programs. And the payment of the final 2019 fiscal year dividend in the amount of $55.9 million.

Turning now to Slide 13. I will cover a few prospects of the capital management. First, I want to highlight that the company's balance sheet remained strong with a gearing ratio of 38% and a leverage ratio of 1.9x. The balance sheet profile and the completion of the U.S. private placement refiners, position the company well to take advantage of ongoing opportunities and supporting to invest in technology and innovation and revenue growth, either by greenfields or by bolt-on acquisitions, particularly in the Life Science business. The USPP refiners also helped to expand the average debt maturity rates to 4.8 years on a drawn and undrawn basis, and reduced the total weighted average funding cost by approximately 20 basis points to 3.8%.

Looking now at the share buyback progress, as stated in prior announcements, the company sees the share buyback program as an effective capital management tool, which is the absence of capital requirements to fund acquisitions or organic growth, enables us to return the eventual surplus of cash to our shareholders in a very efficient manner. With that in mind, the own market share buyback program has been extended to December 2020 with a total amount of $250 million, an increase of $25 million compared to the latest program. Since the inception of the share buyback program, a total of 21.8 million shares have been repurchased from the market, for an overall consideration of $153.4 million and at an average price of $7.04.

And since the implementation of the share buyback program, our buyback activities will be guided by a close monitoring of progress with our acquisition pipeline, CapEx growth projects and debt maturity profile.

Now regarding dividend, the interest dividend for the fiscal year 2020 of $0.115 per share has been declared and represents 56.5% of underlying net profit after tax from continuing operations. The company's policy remains to pay dividend ranging from 50% and 60% as a ratio from the underlying profits. Interim dividend will be partially franked to a level of 30%, continuing operations just to bring franking credits to shareholders and they become available.

If you please turn now to Slide 32, I'd like to make a couple of brief comments regarding the evolution of corporate costs. As communicated in previous announcements, we have been investing in corporate functions and corporate activity to ensure the sustainability growth -- sustainable growth of our business, and this led to increase of such costs over the last 2 years. The company made significant investments in areas such as IT infrastructure, systems, corporate development and human capital development. These investments have -- have delivered expected results and they are an essential component of our ability to continue to grow the business on a global scale. The current level of corporate cost as a percentage of revenue is in line with our goal of achieving 2% ratio by fiscal year 2021, which we believe should be an appropriate level of corporate costs to support the global organization as ALS.

I'd like also to draw your attention to Slide 31, where we provide detailed review of our restructuring one-off costs. From a total of $9.7 million linked to continuing operations, $3.6 million is a start-up cost. The start-up cost is driven by our decision to build greenfield operations whenever attractive acquisitions in strategic markets are not intensified or available. This approach has given us good results and it helps to explain the double-digit organic growth, both in Life Sciences and Asset Care.

We had also $1.4 million associated with acquisition costs, which includes transaction costs as, for example, due diligence work and the brokerage services and one-off integration costs. In the column one-off items, the main cost is related to a foreign exchange loss of $2.9 million realized on the restructuring of intragroup loan balance. And finally, $1.4 million related to restructuring and, positive position reorganization and consolidation of existing business.

To conclude in Slide 33 and 34, you'll find further details on the company's net debt and underlying effective tax rate evolution. Now we hand it back to Raj, who will provide some concluding comments. Thank you.

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

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Thank you, Luis. In closing, Slide 28 demonstrates the alignment of our strategic priorities and our first half of fiscal year '20 performance. For the first half of fiscal year '20, NPAT was ahead of guidance despite some global macroeconomic uncertainty. Full year NPAT guidance of $185 million to $195 million is in line with the typical 52 to 48 first half/second half split. The company has a strong bolt-on acquisition pipeline in targeted Food and Pharmaceutical sectors.

Life Sciences delivered a strong organic growth of 10.2% and a margin expansion of 73 basis points in the first half of fiscal year '20. Organic growth and productivity improvements will continue in the second half of fiscal year '20 to drive an overall margin expansion of 50 basis points on a full year basis for fiscal year '20.

For Geochemistry, subdued exploration led to 11% sample volume decline for the first half of fiscal year '20, relative to the prior corresponding period, a slight improvement is expected in the second half of fiscal year '20, as mining activity slowly increases but sample flows will still be slightly negative compared to the prior corresponding period for the second half of fiscal year '20.

Strong performance in Inspection, Metallurgy and Coal will compensate for the revenue -- Geochemistry revenue decline, resulting in a low single-digit revenue growth for the division in fiscal year '20. Industrial had a strong first half of fiscal year '20, with a 27% increase in EBIT, driven by new business wins and productivity improvements, and this is expected to continue in the second half of fiscal year '20.

The fundamentals of the business continue to be strong despite some impact from macroeconomic uncertainty, as noted on Slide 29.

Thank you for your time and attention. The call is now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go to the first caller.

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Unidentified Analyst, [2]

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It's [Michael Hughes] from Jefferies. Firstly, I just wanted to start on geochem. You still have positive price offsetting volume in the first half. Can you just talk to what we should expect for the second half? And what's the likely outcome to pricing in the current environment over the next 12 to 18 months?

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

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Yes. So thank you, Michael, for your question. I mean, I think what-- the 11% sample volume decline. And really, we only saw a 2.9% revenue decline for geochemistry in the first half, really, the difference there is really price and mix for geochemistry, and the expectation is we'll continue to see that benefit come through into the second half. We bring you 3 of our major contracts, and we believe that, that pricing will continue to come through for us into the second half.

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Unidentified Analyst, [4]

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Okay. So it's not that you can see all of that geochem revenue would be out in that below single-digit decline in your volumes?

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

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Can you repeat that please, Michael? You didn't come through so well.

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Unidentified Analyst, [6]

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Sure. I just said. So it's not inconceivable to think that we could see geochem revenue growth even with low single-digit volume declines?

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Raj Naran, ALS Limited - MD, CEO & Director [7]

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Yes. I mean, it's not -- I mean, I think we're cautiously optimistic. We are starting to see slight improvement in Geochemistry sample flows in the second half. I mean, there are some global macroeconomic activities going on in Latin America, in Africa and in Hong Kong. Hong Kong were not impacted by geochemistry. But and so those social and political issues sort of settle for us. I think it's not inconceivable, but currently, we are seeing a slight increase. And we'll see how the second half plays itself out.

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Unidentified Analyst, [8]

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Okay, great. And just a couple on the Mexico Pharma acquisition. Based on the revenue and EBIT contribution, the margins look very high in that business. Is that right?

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Raj Naran, ALS Limited - MD, CEO & Director [9]

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Sure. Yes. I mean, I think -- I think what we've seen with that acquisition of ARJ, is that the team there has done a good job with its integration, and we are seeing contribution from that business come through a little bit sooner than we expected. So -- and it's expected to continue as it becomes fully integrated into ALS.

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Unidentified Analyst, [10]

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And just based on the disclosure in the report, it looks like the business was purchased on a low double-digit PE multiple, does that sound about right as well?

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Raj Naran, ALS Limited - MD, CEO & Director [11]

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Yes. So yes, it sounds about right.

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Operator [12]

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We'll go to the next question.

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James Redfern, BofA Merrill Lynch, Research Division - VP [13]

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Yes. James Redfern here from Bank of America, Merrill Lynch. Just a couple of questions, please. It looks like ALS's organic revenue growth is much stronger than its global peers. And I was just wondering if you could please comment broadly on the key drivers behind this? And I've got 1 or 2 more after that.

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

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Yes. So thank you, James. I mean, I think for ALS, and we've communicated this to the market over the last few years. Is the company is really focused on several items, cost base management, efficiency and productivity improvements in the business as well as very focused business development and client service delivery. And what we're seeing is we're seeing that coming through the business, and we are seeing us pick up some market share, and we're seeing that above industry average organic growth coming through for the business.

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James Redfern, BofA Merrill Lynch, Research Division - VP [15]

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Okay, great. So that increase in market share is that in both Geochem and Life Sciences?

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Raj Naran, ALS Limited - MD, CEO & Director [16]

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Yes.

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James Redfern, BofA Merrill Lynch, Research Division - VP [17]

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Okay, good. And just a quick question, just following up from Michael's question on Geochem. So price increases in the first half appeared to be around about 8% versus PCP. Should we be expecting any more price increases going forward? Or is -- are we close to topping out on the price increases? And then -- and how are you thinking about all sample volumes going forward? I mean, are you seeing any sort of green shoots to see an increase in your sales volumes in the near term?

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Raj Naran, ALS Limited - MD, CEO & Director [18]

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Yes. So just on the price increases, I mean, we've seen price increases come through the first half. I think we'll continue to see the same level come through the second half. I mean, in the current environment, and everybody knows what's going on in the commodity space. It's not unique to ALS. I think it would be unusual for us to try to get further price increases until we actually start seeing the overall market and more equity coming into the sector. So I think we will see some price increases come through in the second half, but those will just be a continuation of what we're seeing right now. And again, we're not pushing single-digit or high double-digit -- single-digit price increases at this point until capital volumes pick up. And again, your second question on sample volumes. We are starting to see a slight improvement in sample volume relative to the first half of this year. I think, overall, where we will end up for the second half, we'll still see a slight decrease in sample volume when compared to the prior corresponding period. So first half was an 11% sample volume decline compared to the prior corresponding period. So far, we're actually seeing that delta become a little bit less. So we are seeing the sample volume declined to be more in the 6% to 8% range. So that actually implies that we're seeing a 5% to -- 3% to 5% sample volume improvement.

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James Redfern, BofA Merrill Lynch, Research Division - VP [19]

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Okay. And just 1 more if I could from me. Life Sciences margins were up 73 basis points in the first half, but you're sticking to a 50 basis point margin improvement for the full year, is that just driven by the typical seasonality of the September half being stronger than the March half? Or do you think you're being too conservative on that 50 basis point margin improvement for the full year?

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Raj Naran, ALS Limited - MD, CEO & Director [20]

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I think the 50 basis points for the full year is really a minimum expectation on our end. And the second half, we do see some seasonality in the Life Sciences business. And so we expect to see the same, and we expect a normal second half seasonality. So I believe that 50 basis points is a reasonable expectation from the business.

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Operator [21]

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And we'll take the next question.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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Alex Karpos from Goldman Sachs. Just wanted to dive into mining a little more just on the sample flows. First of all, if you could maybe parse that out by region, any pockets of strength or weakness that you're seeing? And then at a higher level, you look at the kind of macro indicators, the gold price is obviously doing great. The CapEx charts that you all put in here and that we've been tracking are all trending up into the right. Can you maybe walk us through why you think this cycle hasn't translated to volume growth yet? And what will be the catalyst for that to start kicking in maybe FY '20 and beyond?

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

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All right. Thanks, Scott. I think if we just sort of unpack it at a high level, the gold pricing is driving activity, in particular, it is driving activity in Australia and in Canada. We are seeing increased activity in those regions. Where we are seeing some sample volume sort of decline or more conservatism in sample volumes is really in Latin America. I mean, there's a lot of social issues and political issues going on there. I mean, if everyone's looked at the news, Lima, Chile, Bolivia, Ecuador, all of them are having some social and political issues, which is really impacting mining activity and the ability for us to get samples. I think once that settles down, we'll actually start seeing sample improvement from those regions. And the other region, that is -- have some political issues is in Africa. There's a huge push for local ownership. So we have a reasonable operation in the DRC. And there is some political issues that's slowing down mining activity. The rest of our regions are all starting to show sample volume improvement. So I believe we're being a little bit realistic in terms of what we expect to see from geochemistry, if some of these issues escalate. And I think there is a risk that sample volumes will decline. And in some of these -- in some the regions, these issues resolve themselves. I that's also an upside for sample volumes to tick up.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [24]

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Got it. And I appreciate the color on the Africa kind of push for local ownership. But are there any other regions where you're seeing tighter competition on the geochem side?

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

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Not on the exploration side. I mean, I think for ALS, the exploration side there, we believe that we are the market leader in this space. And typically, we get to see early signs of what's going on in the business first. I think competition has always been there. I think for us, we're still seeing growth with our major mines. It's really -- it's in the equity raisings and with the junior miners, where we are seeing the sample volume decline. So all of the major miners are still increasing the capital spend for exploration, et cetera, and we're benefiting from that. What we've not seen is increased equity into exploration currently that would actually drive the additional sample volume increases that we'd hope to see once the cycle starts picking up again.

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Operator [26]

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We'll go to the next question. (Operator Instructions)

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John Purtell, Macquarie Research - Analyst [27]

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Look, just had -- this is John Purtell here from Macquarie. I just had 3 questions, if I can. Just in terms of the Industrial business, obviously been sort of lagging business for a couple of years. So pleasing to see that recovery. In terms of what's driven that improvement? I mean, how much of that sort of internal versus external better market conditions?

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Raj Naran, ALS Limited - MD, CEO & Director [28]

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So for the Industrial business, I think it's a combination of both. We had indicated at our full year results that we were really focused on cost base, because that Industrial business, especially the Asset Care business that was transitioning from CapEx related projects to OpEx related projects, which are typically lower-margin work. And the management team has done a good job of readjusting their cost base. So there has been a fair amount of internal cost base management to adjust our cost base. And what we've also seen is our business development activities start paying off. So we are seeing increased win in Australia, and in particular, the U.S.A. The Asset Care business has really been growing and growing strongly for us. So it is a little bit of a combination of those, probably more organic growth coming out of the U.S.A. and then Australia, but we're seeing it come out of both regions.

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John Purtell, Macquarie Research - Analyst [29]

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Just in terms of the Industrial -- sorry, the Environmental business, your revenue growth accelerated through the first half of last year. Just in terms of the drivers, so that obviously had the Latin American remediation work. But was it just that or there's other regions helping?

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Raj Naran, ALS Limited - MD, CEO & Director [30]

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Yes. So for the Environmental business, I mean, I think, what we indicated, Environmental grew by 15.6% in revenue. So that's been across the globe. So we've seen our Environmental business grow in Australia. We've seen our Environmental business grow in Latin America. And even if we take out the remediation project that we can't have the tail end of finishing, the Latin American business is still showing strong growth, and we've also seen solid growth come out of the U.S.A. And we've been calling that out for a while that we expected to see infrastructure projects and our market share to improve there, and that's coming through in our first half results.

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John Purtell, Macquarie Research - Analyst [31]

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And just a last one. In terms of the Minerals business, are you expecting a normal shutdown period through the upcoming winter in U.S.?

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Raj Naran, ALS Limited - MD, CEO & Director [32]

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Yes. I mean, I think, on a global basis, I mean, a normal shutdown or slowdown period will start around mid-December and then we should start seeing things fire back on towards mid- to late February. So there's nothing telling us that, that will not be a normal shutdown.

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Operator [33]

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Next caller.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [34]

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It's Nathan Reilly here from UBS. A quick question, Raj. Just in relation to those geochem sample flows. I think it was at AGM, you flagged that the 1Q '20 sample volumes have been flat on 4Q '19. Can I just get a sense of how the 2Q '20 shaped up versus 1Q '20?

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Raj Naran, ALS Limited - MD, CEO & Director [35]

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So I think what we'll see in the second half of this year in terms of geochemistry sample flows. I mean, I think if we compare it to the prior year corresponding period, we'll still see sample flows a little bit off. We'll still see a slight decline in sample flows. And again, that's what we're seeing right now. And so I don't see that being any different moving forward.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [36]

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Yes, sure. No, I think -- sorry, the question was just in relation to 2Q '20. So you flagged previously that the 1Q of '20 sequentially was going to be flat on 4Q '19. So I just wanted to understand how -- how 2Q shaped up. I take on board your comments around the second half outlook already, but just more around how the 2Q was.

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Raj Naran, ALS Limited - MD, CEO & Director [37]

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So the 2Q was actually down on the previous corresponding period, right? So we actually saw things slow down, probably around the 8% decline on that quarter that we're comparing it to.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [38]

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Got it. And how did it -- how -- was it down significantly on 1Q of '20?

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Raj Naran, ALS Limited - MD, CEO & Director [39]

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I'm just working through the numbers in my head here, 1Q '20. And so I think that the overall at was down 11%, and so we probably were down a little bit stronger in the first quarter. Sorry, we were pulling up that data while we're talking to you, Nathan.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [40]

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Okay. While you're working that one, just a final question. Just in relation to your M&A pipeline. I think it was about, 6 months or so ago, you flagged that you're prosecuting about $70 million worth of M&A in that Life Sciences space. It looks like you've done a number just short of that in the half in terms of acquisition activity. Can I get a bit of an update on how the pipeline sort of shaping up now in terms of M&A activity or M&A targets that you're assessing at the moment?

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Raj Naran, ALS Limited - MD, CEO & Director [41]

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Yes. So currently, I mean, we have a strong pipeline of bolt-on acquisitions, predominantly in the food and pharmaceutical space. And those opportunities are in various stages in the M&A process. So we have businesses that are in NDA, we have businesses that we're getting some information and we have some businesses that are at various stages of due diligence. And I think for us, once those assets due diligence, and we'll seek board approval to get those businesses over the line. But we believe our pipeline is strong. And again, I expect us to execute on M&A over the next 6 to 12 months.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [42]

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Okay. And with that -- the value of that pipeline? Is that broadly similar to what we've seen historically to sort of around that sort of sub-$100 million mark in terms of capital deployment?

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Raj Naran, ALS Limited - MD, CEO & Director [43]

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Yes. So I mean, our pipeline is a little bit stronger than the $100 million mark. I mean, we have a pipeline that's probably in the $300 million and $400 million mark. I mean, it would be very unusual to get all of them over the line because typically at least half of them will fall away just because of not passing due diligence. So our pipeline is sufficient to meet our current criteria by acquisitions.

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Operator [44]

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We'll move to our next caller.

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Peter Drew;Carter Bar Securities;Director, [45]

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It's Peter Drew here from Carter Bar Securities. Just a couple of questions from me. Just firstly, on the geochem. You've said previously that I think that some of the say new customer activity was subdued, just given that they were sort of reassessing post sort of some M&A activity. I'm just wondering what you're seeing in terms of activity from those customers? And then more broadly, just in terms of the improvement in volumes that you've seen recently. Is that coming from seniors or juniors? Or is that more of a factor of lapping a kind of weaker comparable period?

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Raj Naran, ALS Limited - MD, CEO & Director [46]

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So Peter, just I'll sort of start at the top. I mean, I think for us, what we're seeing is our major mining clients are actually delivering sample volumes as expected. So they all projected growth and the CapEx spend, in particular in exploration, and we are seeing that activity coming through for us right now. As it relates to what's going on with junior miners et cetera. I mean, I think what some of the sample volume increases that we did see, overall increases that we saw, really related to subdued equity funding. So there was some equity funding, and that went into the ground reasonably quickly, and we saw a benefit of that. I think what we'll see moving forward is we'll continue to see our major miners deliver as per their plans to ALS, and that will be increased sample volumes. And we are hoping we'll see increased activity in the equity market. So we'll see additional funding come in to drive some of the growth at the junior level. I think the net impact of all of that is we'll see sample flows improve relative to our first half, but I still think it'll be a little bit down on what we saw in the second half of last year.

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Peter Drew;Carter Bar Securities;Director, [47]

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Yes. Okay. And just the second question, just in terms of the improvement in Industrial. Just how sustainable do you think those improvements are. And I mean, what's the trajectory? How are you sort of seeing the trajectory over the next kind of 1 to 3 years in that business now? And does this substantial improvement cause you to sort of maybe we think selling the business? Or revisit selling the business?

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Raj Naran, ALS Limited - MD, CEO & Director [48]

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I mean, I think from an ALS perspective, and I'll sort of answer the question last person going to the rest of it. I mean, I think from an ALS perspective, we evaluate our portfolio of business every 12 months, we look at the businesses and see what's on the strategy, what's not and make decisions based on that. I mean, currently, the Industrial business, the Asset Care business sits in our portfolio. So we're 100% committed to ensuring that, that business performs to our expectations.

So really, again, as early -- as I commented earlier, that business has done a good job transitioning from CapEx projects to OpEx projects. The management team has grown the top line. At the half year results, we have seen revenue improvement, but we still saw margin decline and we didn't see EBIT improvement. Where we sit at the half of this year, we've seen revenue improvement, we've seen margin improvement, and we've seen EBIT improvement. And the expectation is that, that trend will continue. I mean, that business will always be a low-margin business. So typically, that business will typically always sit between 10% and about 15%. I mean, I don't think we expect the business to do better than that. And again, the management team there has a very strong business plan that's showing growth for the second half and moving forward. So I think for us, we'll see how we end up on a full year basis, and it shows that their business plan is on track to continue to show growth moving forward as with all of our other businesses, too.

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Operator [49]

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(Operator Instructions) We'll go to our next question.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [50]

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It's Rohan Sundram from MST. Just a question from me. Raj, what impact are you seeing at all on the business from trade wars. You talked about some of the social unrest issues earlier, but it seems like the testing inspection companies are holding up a lot better than other industrials. So what kind of impacts are you seeing from that?

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

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So really, I mean, I think on the trade tensions that we're seeing between the U.S. and China, in particular, what we're really seeing is confidence in the sector itself. So typically, it's not impacting the current miners, it's not impacting their activity or anything. The component of the business that we are also typically count on an upcycle is equity funding coming into the sector. And I think with the trade tensions, some of the equity that would normally flow into this sector is being diverted into other spaces. So both in Canada and Australia, where folks are raising equity. I think we're seeing equity going into tech and some other sectors versus coming into exploration. And I think once those trade tensions subdue, I think we'll start seeing equity come back. And that's why I'm still of the belief that we're in a mid-cycle pause, and once we start seeing equity come back in, I think we'll see things pick up again.

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Operator [52]

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We'll go to the next question.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [53]

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It's Siraj from Citi. Raj, 3 questions. First thing on the outlook for commodities margins. You've given, I mean, you've given revenue, did you think revenue will be slightly up in the second -- for the full year? But just what you think for margins? Have you taken some costs out in geochem, et cetera?

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Raj Naran, ALS Limited - MD, CEO & Director [54]

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Yes. So we have -- I mean, I think the result that's being delivered for commodities clearly demonstrates our ability to really scale up and scale down that Geochem business. I mean, the fact that Geochemistry is still maintaining a 28% margin is very positive for us. And we believe that we'll continue to manage that business at a high profitability level, even with the current sample flows. So we have been able to manage the cost base very well there.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [55]

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Should we expect a margin improvement, Raj, on a half-on-half basis?

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Raj Naran, ALS Limited - MD, CEO & Director [56]

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I think if we start seeing a slight sample volume improvement, we should. Because, again, that business is 1 of scale and volume. So as we start getting volume there, the revenue to EBIT conversion is very strong in that business.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [57]

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Sure. Secondly, just -- can you just talk through the low end versus the high end of the guidance, how we should think about it? What would be the assumption there $185 million versus $195 million?

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Raj Naran, ALS Limited - MD, CEO & Director [58]

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I think for us, we typically -- expected that question. I mean, typically, we always provide just a $5 million range for our guidance. I think currently with some of the macroeconomic issues going on. I think we've just taken a little bit of a more pragmatic approach with this. I think that the low end would imply that some of the social issues going on in Latin Americ,a., it's a big resource and mining confidence. So if some of those don't settle down and disrupts mining activities, and I think we'll see some impact of that into our business. I think, in Africa, we can't resolve some of the political issues, we'll see some impact. On Brexit, we have a large business in the U.K., and our take on Brexit, but the issue we have now is there's no activity. I mean, hard Brexit soft Brexit, but we just want a Brexit. So people can just get on a moving thing.

So I think it's those different factors that could have an impact that would push the business typically to the lower end of things on the guidance. And actually, with the risk factors. There's also an upside for the business and in business activity that's going on in the business. So I think, again, the current range is appropriate with what's going on, so on a -- at a macroeconomic level.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [59]

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Got it. And just lastly, Life Sciences margins, a strong improvement there. I mean, you've previously guided to the medium-term margin guidance of 16% to 17%, right? So close to 16% range. Just keen to understand how you're thinking -- I mean, about the guidance range on the medium-term targets really?

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

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Yes. So Siraj, I mean, we ended up Life Sciences last year at a margin of 15.1%. We said, our commentary and our expectations was that we would see about a 50 basis points overall improvement in the Life Sciences margin on a full year basis, for this fiscal year for fiscal year '20. I believe we're going to get there. I think it will take us to 15.6% at a minimum. And then the expectation is as we move into fiscal year '21, we'll continue to see that range of improvement in the market. So I believe in fiscal year '21, that business will start moving into the 16% margin range. And that's the progression and the journey we expect. I mean, I think the higher we get with margins the overall margin improvement on a year-on-year basis start getting a little bit tighter.

I think we're on a good journey. I mean, I think we'll look at this journey, and we show a little bit of the margin progression on, I believe it's on Slide 16. I think it's a good journey that we're on it. And the expectation is that will continue for us.

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Operator [61]

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We'll move to the next question. (Operator Instructions) We'll go to our next question.

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Unidentified Analyst, [62]

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This is [Michael] again at Jefferies. Just with a couple of follow-ups. In Life Sciences, I just wanted to understand what changed in the U.S. with margins up 700 basis points?

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Raj Naran, ALS Limited - MD, CEO & Director [63]

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What changed in the U.S. is we had -- we have spoken about it, and we've been talking about it for the last 12 to 18 months was really introduction of our global efficiency and productivity improvements that we've been able to develop. And so we've been executing on those in the U.S.A. What we've also seen is our ability to pick up some market share in the U.S.A. We've seen some infrastructure projects actually deliver samples, which we had indicated, we have been awarded a few projects that we have not seen any examples. So in the U.S.A. I do believe that, that business is on a journey for continuous improvement. And again, most of our life Sciences businesses are fixed-cost businesses. So when you start getting revenue -- additional revenue into them. You really see some significant improvement, both in EBIT and margins. So again, it's a good result for the U.S.A., it's still -- that business still needs to continue on its journey, but it's really been both internal and external factors that's helped us improve that business.

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Unidentified Analyst, [64]

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Okay. I was just going to ask how much of the 70 bps in total Life Sciences margins was due to the U.S.? It's my understanding that the U.S. has more than 10% of Life Sciences?

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Raj Naran, ALS Limited - MD, CEO & Director [65]

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So the U.S.A., I mean, the U.S.A. is -- and we typically don't break down how much the U.S.A. actually accounts for the total Life Sciences business. But I think what we've seen, and I can provide just a little bit of commentary on the Global Life Sciences business. So we saw margin improvement in Latin America, we saw margin improvement in Australia, and Asia, very high-margin improve -- high-margin businesses. So there was an improvement, but it's a slight improvement. And we saw margins being relatively flat for us in Europe. So really, Canada, U.S.A., Latin America, Australia, and Asia, we saw margin improvement. So I think it's just a combination of all 3 of those. And again, we typically do not break out the U.S.A. as a single region.

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Unidentified Analyst, [66]

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Okay. And 1 final -- just a small one. On the start-up costs, I think it was $3 million that were taken as one-off within Life Sciences. Just wondering what are these costs? And are you targeting additional greenfield start-ups in the future?

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Raj Naran, ALS Limited - MD, CEO & Director [67]

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Yes. So I think just on that, our view with greenfield start-ups is really -- it's both strategic. So there are some new geographies that we want to enter. And we believe we can enter them through greenfields. And that's an ongoing activity for ALS, but there's also other markets like India. I'll use India as an example, where we've gone into that market, we know it's a market that we do want to participate in, especially in the Pharmaceutical and Life Sciences space. The multiples for buying businesses in India are very high. And so for us, a more cost-effective and more efficient way to enter that market was through greenfields. So rather than paying 14x, 15x EBITDA multiples in some of those markets, we'll actually enter those markets more cost effectively and actually get paid back within 4 years.

So I think that's ongoing for us. I think we'll see, again, if we start seeing during acquisitions, as businesses going for much, much higher multiples. And I think our greenfield activity will actually start escalating.

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Operator [68]

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And everyone, at this time, there are no further questions. I'd like to hand the call back to Raj Naran for any additional or closing remarks.

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

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All right. Thank you very much for your time. And as always, if anyone has any additional questions, please reach out to Simon Starr, and we're happy to schedule a call or a meeting with anybody here. So again, thank you very much for your call. Bye-bye.

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Operator [70]

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Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.