SciDev Limited (SDV) Earnings Call Transcript

Good morning. Welcome to SciDev's investor presentation for the FY '25 Financial Year-End. We'll go through a formal part of the presentation, and then there'll be room at the end for questions. And if you could just add those to the bottom of your screen, and we'll work through those in turn at the end of the presentation. But without further ado, let me hand over to the CEO, Sean Halpin, to get us underway. Sean?

Thank you very much, Adrian, and thanks to everyone for taking the time to join us this morning. To open, I just wanted to state that FY '25 is a pivotal year for SciDev. At first glance, the financial results are largely in line with what we delivered in FY '24, but it's important to call out the significant strategic advancements that we've made throughout the year and also the strategic investments that we've made to accelerate future growth. So over the coming slides, we'll walk through a lot of the detail around the financials, do a bit of a deep dive there and provide some of the narrative that sits behind the numbers. But we're also going to unpack some of those strategic wins, focus on the areas that we've invested in and we've reinvested returns in for future growth and also talk to how with both of them tied together that we're in a great position to be able to deliver meaningful growth into FY '26 and beyond. So to start, we'll just -- we'll kick into the sort of the what and the why around SciDev. As always, our purpose is to deliver innovative solutions that solve the industry's most complex water problems. We're split into 2, operational and business segments, Chemical Services and Water Technologies. And both of them provide a wide range of innovative technologies and solutions to a range of end markets and now very much a global footprint. I think it's important to do just a quick refresh on strategy. And as ever, we are acutely focused on achieving our winning aspiration of building a diversified and globally significant portfolio of industry-leading water businesses. Now what sits below that tier, that's the first cube on the top of that pyramid. What sits below that tier is our global market focuses. And that gives us the guardrails within which the portfolio is going to be operated from a market sense. Each one of these areas has got regulatory tailwinds. It's got growing addressable markets, but importantly, has a need for tech-driven solutions for the clients that operate within those markets. And beneath that talks to our operating model, and it’s the framework within which is going to facilitate us achieving our strategy and talks to the owner mindset that we foster within the business, having appropriate governance, delineation of business units and ensuring that we remain scalable and agile as we continue to grow and scale. And the last piece is our core competencies and capabilities. And really, they're the foundation for this strategic pyramid. And they are the tools that we're going to need to be able to achieve this strategy. We talk in everything from tech and R&D focus, ensuring that we maintain ourselves at the coal phase-through to disciplined capital management, operational excellence and M&A to supplement our organic growth ambitions also. And to the left of the screen, we've just called out a number of our strategic focus areas for FY '26. Market share growth right up there front and center, and that's about developing and converting a high-quality pipeline, continued margin expansion and continuing on that journey of pivoting away from commodity, low-margin products and services through to higher-margin proprietary products. And operating leverage, and that's driving earnings growth by maximizing the utilization of our existing infrastructure and assets while maintaining a very disciplined cost base, which we can leverage as we layer revenue on top of that. And tech and innovation, very much a core to who we are as a business and also to our strategy, maintaining that technical edge and superiority from a competitive perspective. So when we run into the '25 highlights, and I'm not going to talk in too much detail about this because Anna will cover it in the coming slides, but revenue of $103 million was down slightly on FY '24. Throughout the year, we saw that impacted by a softer Q2 from some seasonality there. But largely, the story that sits beneath that is around that conversion away from higher-value, lower-margin contracts through to more proprietary chemistry. We've also seen some unfavorable phasing in terms of the execution of some mining and water contracts throughout the year, but that's really takes away from our FY '25 results, but certainly shores up our FY '25 results, shores up our FY '26 pipeline. And EBITDA, $7.1 million, down on prior year, but would certainly be up on prior year if we built into it or if we didn't strategically reinvest earnings back into accelerating growth across the business. More positively, gross margin of 28%, again, talks to that strategic shift over to higher-margin projects, and we finished the year from a cash perspective in a better position than when we started it, maintaining positive operating cash flow throughout the year, and we've got a $10 million working capital facility there to support our ongoing organic growth ambitions. So from an operational perspective, as I said before, we made some really significant strategic advancements across the board and across each one of our business units. We extended our operational footprint across our core markets, strengthening our presence, and that's largely in terms of strengthening our sales presence, and market-facing presence in North America, Asia Pacific and Europe. Within the oilfield, after a focused push into the Permian, we converted our first material contract in that space, which will generate $10 million throughout the year. But also very pleasingly, we saw CatChek sales increased 46% throughout the year. And again, another sort of core component of our energy services strategy was to focus on the growth of CatChek sales. We had some milestone wins in PFAS treatment in Europe and North America, securing our first commercial contracts, one being with the U.S. Department of Defense, our primary target client for the U.S. market. But more broadly, we continue to develop a strong pipeline across each one of our business units, and that talks back to that strategic focus of expanding our market share across the business. We reinvested heavily in the business this year strategically looking to increase our business development capability, focused largely on international expansion, positioning the business to deliver growth not only into FY '26, but in the years to come. And we strengthened our Board throughout the year to support that next phase of strategic growth for us. So that's an initial sort of high-level snapshot. I'm going to hand over to CFO, Anna Hooper, now to talk through some of the finances in some greater detail. And then afterwards, I'll pick up a bit of a segment breakdown prior to running into outlook. Anna, over to you.

Okay. So focusing first on earnings year-on-year. So SciDev delivered a solid financial performance in FY '25. As Sean has just talked about reinvesting profits into initiatives to drive growth into '26 and beyond. So from a revenue perspective, revenue contracted 5% compared to FY '24. Revenue from Chemical Services was largely flat, and from Water Technologies, it contracted 26%. Pleasingly, the gross margin for the group improved by 2% compared to '24, and we're now at 28% gross margin. And that reflects this continued transition to proprietary products that command higher margin than commodity chemistries. So moving on to underlying EBITDA. Underlying EBITDA performance for the year was $7.1 million, which is 19% lower than in FY '24, but includes cost of growth -- significant growth initiatives that we embarked upon and continued with across all of our business units. Operating cash flow was positive at $2.9 million for the year and included within the operating cash flow is $3 million of U.S. tax payments, which included a catch-up from FY '24 of $700,000. Whilst it should be noted that Australia continues to have significant unutilized tax losses, the U.S. has been in a tax paying position for the last 2 financial years. Previous to that, we were also utilizing losses. And now moving on to the statutory EBITDA. So statutory EBITDA is $6.2 million, and that's after the inclusion of $900,000 of costs that relate to an unsuccessful acquisition that we embarked upon in FY '24 and the costs were incurred in FY '24 will be paid for cash flow move in FY '26. So we recorded a tax loss or a net tax -- net loss after tax of $900,000 in FY '25. So that was after depreciation, which was flat year-on-year at $4.2 million and interest and finance costs of $500,000. Actually, what should be noted in there is that the tax expense in FY '25 was $2.3 million, and that's some $400,000 higher than in FY '24, and that reflects higher taxable income in the U.S. in '25 than '24. So next slide, Sean. So from -- an operating cash flow was positive in FY '25 at $2.9 million. So it's a key focus for management, and we metric EBITDA cash conversion. So we achieved 90% cash conversion in both '25 and also in '24. And the team is very focused on the importance of working capital management. So as of June '25, we had a significant increase in the amounts outstanding from customers as we've increased our debt period, particularly in the oilfield, but that's been largely offset by amounts payable to suppliers by extending supplier terms. So our inventory was flat year-on-year at about $7.4 million. I think we talked about this previously, but tax paid this year was $3 million. That compares to only $1.1 million last year. In part, that's higher tax expense this year, but also we paid $700,000 of tax related to FY '24 in '25. That was delayed due to tax and hurricane relief provisions, which were in place in the latter half of FY '24. So within our investing cash flows is the acquisition of 25 new ISOs for use in the Energy Services business. And overall, our PPE has remained stable year-on-year at about $11 million net with CapEx being offset and new leases being offset by depreciation. Within financing activities, the company paid the final consideration of $3.2 million relating to the 2021 acquisition of Haldon Industries, and this was funded by a nonrevolving credit facility from Westpac. The total debt outstanding to Westpac is $3.5 million as of 30 June, and the closing cash in the business is $9.7 million. Sean, back to you.

Thank you very much, Anna. So I'm just going to run through some brief segment performance, calling out some of the particular highlights from each segment, talking to the investment that's been made throughout the last 12 months and finish it on some outlook. As Anna mentioned, in Chemical Services, we have largely flat line revenue. But from a highlights perspective, a lot of these have been called out before, but we saw that increase in CatChek sales of 46% year-on-year, again, a key cornerstone of the Energy Services strategy. We saw the growth of our customer footprint in U.S. oil and gas. We reduced our customer concentration. It's been especially of late, a slightly more challenging environment in there and what we've been able in U.S. oil and gas. And we've been able to demonstrate our ability to grow our customer footprint, win new work within that challenging market conditions. And we spoke about before that that real milestone contract within the Permian Basin expected to generate $10 million of revenue in FY '26. This is a perfect example of how investment in the business has been able to generate short-term returns for us. We had been unsuccessful in trying to penetrate the Permian Basin in previous years. We invested in growing our sales team, putting boots on the ground to target the region. And then by the end of the calendar year, after a period of some field trialing, we were able to secure the first material contract, which is great to see. And that's the trend that we hope to see not only across our Energy Services business, but throughout the rest of the business where we have invested in increasing that sales team. In the Mining, Construction and Infrastructure, we saw a number of multiyear MaxiFlox contracts secured within the period despite having a number of contracts delayed throughout the year. And as I spoke to before, that shows up. Those contracts are still yet to be executed and once secured, would certainly continue to shore up our FY '26 revenue. From an investment perspective, I spoke before, it's been largely about increasing our sales force and focused on the growth into new markets, into new basins, into new regions, both within our Energy Services division, but also more broadly in the Americas to target the mining market focused largely on Central America and Canada at the moment. And from a CapEx perspective, as Anna spoke about, we increased our fleet of ISOs in the Energy Services business to strengthen that on-site delivery and that last mile delivery and component of what we provide. From an outlook perspective, there are potentially some near-term headwinds that we need to be prepared for. Lower oil prices are creating some schedule gaps for some E&P clients, including some of our clients. We have demonstrated in the past, as I mentioned, that we can increase market share and bring on new business within a receiving market, but that is certainly a market dynamic that we need to be very conscious of. But in the medium term, there is some material opportunity for us in U.S. shale gas production as it begins to ramp up over the next sort of 12, 18, 24 months as new delivery infrastructure comes online. We're already seeing some slight uplift in market activity within the Haynesville Shale, and we are going to be targeting BD and sales efforts in that region to try and get some early wins and early runs on the board in anticipation of that market uplift and the increased demand. And Process Chemistry, very much focused on conversion and the growth of our existing pipeline. So our Water Technologies division delivered revenue 26% down on FY '24, again, largely impacted by some delayed contract execution within the business. We also saw 2 challenging projects within the term that both impacted the EBITDA contribution of the business and also the business segment and also the revenue contribution. From a -- they are now both in the rearview mirror and we have certainly put those projects to bed. We've taken those lessons learned and they will certainly not be impacting our FY '26 performance on a go-forward basis. From a highlight perspective, we had some great domestic wins, a $5.6 million water treatment plant for New South Wales infrastructure project and a $2.5 million FluorofIX project for the remediation of the former Munmorah Power Station, both of which, again, sort of key significant contract wins within the domestic market. But as we spoke already, some of the real milestone wins were the first initial wins in the U.K. and Sweden and the first initial wins in the U.S. with Department of Defense. And they are so significant to us because over the last sort of 18 to 24 months of trying to develop those markets, the headwinds that we've had have been based around the fact that we haven't had in-region operations. We haven't validated the technology within the region either in terms of having demonstrated experience, and we didn't have the local reference sites to be able to provide new customers. Both of these advancements in each markets deal with those head on and put us in a great position moving into FY '26. From an investment perspective, was focused on the continued development of the European and North American PFAS markets. That's, again, sales personnel and also the technical personnel that need to support that being a very technical sale. And domestically, we made some key hires in design, engineering and contract management to really bolster up that team. This was in response to some of those challenging projects. We now have the team strengthened and the processes in place to strengthen that project execution and ensure that similar issues don't impact us looking forward. And FluorofIX and RegenIX was independently verified within the U.S., looking at both performance and also the long-term project life cycle cost advantages. And that third-party validation is not something that we've needed to develop the European market or the domestic market has been a key requirement we have found in really penetrating that North American market. So that's, again, a body of work that has been done is a once-off and will certainly aid us in securing new contracts in FY '26. Outlook, domestically, we're looking for return to profitability. We've got a high level of conviction that the business can certainly deliver on that based on the pipeline that we have, we're looking to commence those delayed contracts through FY '26, but also in the new rigor and process and structure that we've built into the team from a delivery perspective. And in Europe and North America, it's going to be continued development, continued conversion of opportunities and really focusing on winning and delivering larger projects. And with Europe, in particular, given the amount of traction that is building in that market, our expectations from that business in FY '26 is to achieve EBITDA breakeven. So more broadly from an outlook perspective, and you're going to see a lot of repeatability in terms of the areas of focus for us looking forward, right. But I think broadly as a theme, it's going to be delivering strong returns from those -- that strategic investment that we've made in FY '25 and leveraging that strategic advancement that's been made over the last 12 months as well. Key focus on pipeline conversion, we know we've got deep and robust pipelines and a strong backlog across our domestic and international markets. We're going to leverage the pain of those delayed opportunities in FY '25 to, again, feed a successful FY '26. We'll continue on our shift towards higher-margin proprietary chemistries and solutions and move away from the high margin -- sorry, high revenue, low-margin commodity sales. A big focus on profitability and improving profitability, both through that operating leverage piece as we spoke about before, but also seeing our Water Technologies business return to EBITDA profit, continued focus on international growth and really looking to that medium-term upside, how do we position ourselves in the U.S. oil and gas market to be able to capitalize off of that increase in U.S. shale production that is coming in the next sort of 12 to 18 months. Adrian, that is all from the presentation at this stage. I think now is a good time to hand back over to you for Q&A. Thank you.

Thank you, Sean. [Operator Instructions] Sean, lots on the call, not surprisingly, and lots of questions as well. So let me kick off with the first one here. So what are the major growth drivers over the next few years? And can you add some more details on potential acquisitions you may have explored as well?

Certainly can. So from a growth driver perspective, because we are operating with this sort of diversified portfolio of businesses, we have a range of different sort of opportunities and potential catalysts for growth. I think in the oilfield, we've spoken about it. We've got big opportunity in the U.S. shale gas play. From a Water Tech perspective, it's really the growing global PFAS market. And I think what's going to drive that growth is the fact that we have sort of laid the groundwork and the foundations, both domestically and internationally. We have runs on the board that we can leverage to continue to grow on that front. And then we're continuing to see a positive trend in international mining or both domestic and international mining where there's a growing need for solutions and chemistries that can improve their water efficiencies. So I think we've -- and I think within that bag, it's really hard to call out one in particular that's going to drive growth over the next 12 months, but I think we're in a very favorable position that we have a number of different growth avenues. From an M&A perspective, we've been quite vocal in the market and that a lot of our M&A effort is likely to be focused on increasing our operational capacity within the European and North American water technology space. We've done a great job of building brand awareness and getting those initial contract wins. But eventually, we're going to be at a point where to truly capitalize off of the extent of the opportunity, we're going to need increased operational capability. That is not today, but we've certainly been looking down those avenues. And Anna spoke to the costs associated with a transaction that we didn't progress with. And while I can't provide too much detail around that, it was a very accretive acquisition, Water Tech focused within the European market. It was one that we really saw a lot of value in and one that we progressed through the financial DD stage. Ultimately, from a financing perspective, with the backdrop of a weakening share price, it got to the point where to proceed with the transaction will be too dilutive for existing shareholders. We backed out of the transaction as it was no longer in the best interest of the business or our shareholders at that. So I think that's a good point to sort of call out the discipline that the business has from a capital management, capital allocation perspective, the discipline that we bring into M&A and our M&A strategy. But looking forward in the next 12 months, I think we'll continue to look at opportunities as they present themselves. And it's certainly a key part of our growth strategy looking forward.

Thanks, Sean. Some pretty important messages in that. So a quick question for you, Anna. I know you spoke about it a couple of times when you went through the financials, but just a question with respect to the tax and just the profile of tax over recent years in this most recent year as well. If you could just talk to that, please.

Yes. Okay. So again, it's probably important that we don't only pay tax in the U.S. on U.S. taxable income. We don't pay tax in Australia and work for some time. We had tax losses that were basically being unwound into FY '22, '23 and only started paying tax in FY '24. The tax expense is higher in FY '25 than it was in FY '24. And I guess the reason that's relevant or sort of focused in on it is that it impacts the reconciliation from EBIT to NPAT quite significantly and also has an impact on operating cash flow.

Thanks, Anna. So back to you, Sean, and you spoke about the number of people boots on the ground specifically. So the question here is about how many new salespeople have you added and where are they based?

So it's -- yes, great question. So that's been spread across each one of the business units in each one of the regions. We've now -- we added 2 heads in the – or sort of 2.5 heads in the Energy Services business. We've increased our team in both North American and European Water Technologies by 1 head each, and we've also added another 2 bodies into our international mining team as well. So sort of 6 in total. We've also invested in growing out the marketing team to -- that sort of sits behind that and provides them with the assets to go and sell as well. So that's sort of in the region of 7 FTEs.

Thanks, Sean. Just to CatChek, good question here. So with the growth in CatChek, who are you displacing? And is it largely yourself?

So it's not largely ourselves. What we're displacing is traditional surfactants that are being added into the frac chemistry blend. I think when we think about CatChek, it is -- and I've used this phrase, we are largely peerless in the space in terms of the fact that it provides -- it's a multi-benefit additive both on the frac cycle, but also provides significant production benefits as well. So although there are traditional surfactants that sort of aid in frac efficiency, but we from a sort of more broader benefit perspective, we are quite peerless in the market. And really, the key to this success is just incremental sales. It's getting more data points. It's getting more runs on the board. It's increasing the brand awareness. And as we continue to provide with these blue-chip E&P companies, the phone is ringing more and more because it's a very vocal industry. It's a small industry. Everyone wants to know what Devon are running in their operations. And when we talk about the growth plan for CatChek, I think we can continue to expect incremental sales and incremental build of that sales pipeline until we get to a real inflection point where that growth becomes exponential.

Thanks, Sean. Next one, I think you spoke quite a lot about the reinvestment that's going on across the business. But question simply, why aren't you dropping more to the bottom line in your water treatment business? The segment numbers show not much EBITDA.

Yes. So I mean there's a number of things at play there. I think domestically, certainly, the business was impacted by 2 underperforming projects, one on the design and construction side and one on the build on operate side. And there's a range of challenges in there, some of it on design. We're entering into, I suppose, a more rigorous design environment, having to meet more stringent design criteria that did cause a significant amount of rework that we had to perform at our own cost. On a build on operate side, it was more on contract management at a project management level. We have -- so domestically, that has certainly had a negative impact on the year. We have rectified that. We have changed out the structure of that team. We've brought in the necessary skills and experience that we need to ensure that we can continue to grow in those areas, take on those more challenging projects and those tighter contracts and be able to deliver. And we certainly expect to see profitability from our domestic Water Technologies business in FY '26. So as I mentioned a number of times, return to profitability is a core focus from that business. Elsewhere, we've also invested in that international expansion piece, and that's obviously a key investment as well. So they're largely the 2 components with regard to the Water Tech service.

Thanks, Sean. So this question goes to the Department of Defense, which you spoke about in your presentation. So how is the trial going? And what is the planned finish date? And if they're happy with how things go with the trial? Do you think it will lead to a Department of Defense wide contract? Or is it just for a small part of the department?

So at the moment, it is servicing 5 individual defense bases across Texas and Oklahoma. And what we're calling that is the milk run and that is small volumes of highly contaminated PFAS waste that have been generated on these operations. And we've been constructing a mobile unit that will be able to be taken around these sites and treat these low volumes of water. So the project is yet to really kick off and gain huge traction. We've just completed the build of the mobile system. We have the first milk run planned for October. And really, I think being able to -- I think the beauty of that contract for us is it gives us dots on the map from a DoD perspective and a PFAS treatment perspective. We're able to demonstrate that we've been on site on multiple bases and that we've been able to -- and successfully treat PFAS across multiple bases as well. So real validation of the technology and our operational capability with the U.S. Department of Defense. If it is successful, there's already conversations about extending that from 5 bases to 7 and then potentially to 10 after that. But really for us, it's about having those reference points. And then when we start to bid for larger DoD contracts that we have those ones on the board and those reference points to be able to point to.

Thanks, Sean. Sounds very perspective. So just on question with Nuoer. So the JV, how is the Nuoer distribution agreement benefiting the business? And what are the early positive indicators?

So the distribution agreement, so there's 2 essential pieces there. There's one that Nuoer is our manufacturing partner that supplies our domestic business. That is -- so the benefits that we're getting through that agreement is high-quality product and our ability to fine-tune the specs that we require once we're on site and we want to -- whether it's tweak the molecular weight or the charge associated with the chemistry that we're provided to be able to have a bespoke product for an individual application. Nuoer have been able to rapidly get that into full-scale production for us and get it at the site quickly. So we've got an agility that Nuoer provide and a quality that they provide and also scale in that they are the second largest producer of polyacrylamide chemistry on the planet. Through the joint venture, we've had some early wins, which is slightly -- it's a 50-50 joint venture with Nuoer domiciled in Singapore. We've had some early revenues, a very sort of small scale over the last year. And that joint venture is focused on tackling more price-sensitive large-scale contracts on a global basis. So we're developing that pipeline. We have both our staff and Nuoer staff focused on identifying opportunities and pursuing them. We've had some trials, both on the lab and on-plant trials now scheduled into FY '26. So I think certainly a positive outlook with regard to the Nuoer joint venture.