Combined my notes on the 30 Sep 2023 Quarterly Update and today's meeting with Vince Stazzonelli.

Discl: Held IRL and in SM, looking to top up IRL if the price falls closer to $0.90.

Built this simple revenue xls to get a better perspective of the 1QFY24 results against FY23, will add in subsequent quarters

• Solid result with PBT growing much more than Revenue
• Consumables was up 15.8%, Capital Equipment was up 27.5% but Precious Metals was down 14.9% over the PCP
• Revenue is 5.9% lower than the average FY23 quarterly revenue (average is annual revenue divided by 4)
• Not a concern given the large forward orders held for Precious Metals, but puts the 1Q result in better context, taking cue from concerns previously about the rate of growth from H-to-H
• All segments appear to be firing, with the order book for capital equipment at record levels, and production for some products is now being scheduled for the June 2024 quarter

TAKEAWAYS FROM VINCE MEETING

Industry Tests to test quality of a product which XRF Supports

• XRef Analysis - using X-Ray Fluorescence analytical technique to determine the major components of a sample
• ICP Analysis - ICP (Inductively Coupled Plasma) Spectroscopy is an analytical technique used to measure and identify elements within a sample matrix based on the ionization of the elements within the sample.
• Gold - FireAssay and PhotonAssay (C79’s technology)
• Platinum Labware - this is used in the sampling process. XRF manufactures Platinum Labware for all machines, not only XRF-specific machines

How the XRF Equipment Comes Into Play

• Orbis Mining Crushers - breaks down (crushes) big rocks to provide powder samples, which are then used as inputs to the various tests
• XRTGA Thermogravimetric Analyser - a high-temperature furnace, heats up the sample to run tests at different temperature points
• Market is dominated by key competitor: Leco
• XRF’s benefits over Leco units:
• 30 samples at a time vs 18
• Has heating and cooling cycles to speed up the process
• User friendly Touch Screen vs separate computer console
• Reputation of building reputable products
• Provides complementary data for XRF analysis
• XrTGA opens up access to new markets for XRF - Pharmaceuticals, Food, Agri-Products, Plastics etc
• Capital equipment should have at least 7-8 years of life through to 15 years
• Drives other products - spare parts, labware rework, consumables

Manufacturing Capacity

• Solved factory capacity issue for Capital Equipment this past quarter
• Can ramp up production across all 3 segments by adding more shifts - no further major spend to boost capacity is anticipated

International Expansion

• Already have presence in Europe (Germany and Belgium), North America (Montreal), Australia and parts of Asia
• Direct sales are fulfilled in Australia
• Large network of Distributors which are required to provide on-the-ground customer support
• Not in a position to open offices in many countries - driven by product line and the individual needs of the countries

Cost Pressures

• Cost pressures of the last 12-18M have eased in the last 3-6M - lead time blow outs
• Able to pass on price increases to customers who mostly pay based on the metal spot price at the time of invoice
• Employees were given good pay increases to retain them

Customer Demand

• Exploration activity mostly focused on Rare Earths, Lithium
• Exploration spend did not fall in Australia - Gold spend did fall, but Base Metals, Iron Ore continued to perform well
• Have not seen anything impacted by a slowing of Chinese demand

Capex Management Approach

• Dividend payout ratio is around 60% - this level of dividends is able to provide required capital for R&D, Inventory and Working Capital
• On the lookout for bolt on acquisitions - generally like to issue script to fund these acquisitions to incentivise vendors
• Ideal targets are (1) lab products which have business synergies with XRF’s products (2) used by existing customers (3) are under-developed in market potential
• Not interested in building business scale as XRF is at “about the right size” - focus is on value adding acquisitions

Key Investor Misunderstanding on XRF

• Investors misunderstand where XRF sits in the laboratory process
• High quality products
• Strong IP
• Essential in providing data to mines, industrials
• Critical to customers processes

My notes from the SM meeting with Vance, which helped frame my thesis and buy decision. Will be nothing new for long-time followers of XRF, but XRF was new to me, so had to go back to understanding and summarising the basics of the business. Have progressively added IRL - price has been stubborn in the past few weeks!

Discl: Hold IRL and in SM.

SCOPE

• Manufacture of Products for Sample Preparation Process
• 70% Mining - Miners and Regulatory
• 30% Materials companies - Cement, Steel - ensure quality control of finished goods and raw materials that are being produced
• Exposed to Iron Ore, Base Metals, Gold

STATE OF BUSINESS

Capital Business

• Demand for capital machines robust - 27% of revenue
• Includes 1-2 years of spares

Consumables Business

• 33% margin
• Sticky revenue as customers do not like to change - some require custom formulation to analyse samples and fast turnaround of orders - able to pass on metal increases to customers

Precision Metal Products

• Recycling used metals - repeat revenue

Platinum Products

• Platinum is key - temperature resistant, does not contaminate samples
• Currently losing ($0.8m) but growing in $m revenue
• In expansion mode - expanding MEL facilities, opened German Sales office
• Make-to-Order manufacturing
• Tooling and facilities are set up for multi processes - 3-4 weeks turnaround
• Use scrap metal from customers which are pooled
• Very little recycle loss - this is a weight game
• Cost is made up of cost of metals + fabrication cost - requires end-to-end admin of the precious metals
• Main competitors are in Europe, hence the German sales office

MARKET SHARE

• Machines - about 10 players, but XRF is the biggest
• Chemicals - 50% worldwide - competitors are in Canada. China has equivalent but is not trusted
• Platinum Lab Products - leader

CUSTOMERS

• Key geographies - Australia, Europe, North America
• Growing countries - India, China, Indonesia, PNG, Malaysia, Vietnam
• Revenue is mostly linked to operational/production phase of operations
• Vast majority of sales are direct sales

DISTRIBUTORS

• 20-25 strong distributors - XRF products become part of other products that the distributor sells
• XRF is the only company which manufactures all 3 product lines
• Distributors buy as a customer to get volume discounts, they then add margin - reasonable levels of inventory is usually held for chemicals and parts

GROWTH AREAS

• Geography as mining cycle improves
• Precious metals
• Increased range of products
• Increased demand from China and Brazil - move from cheaper way to a better results focus

ACQUISITIONS

• Have taken a disciplined approach based on set criteria - focused on lab-like products
• Orbis acquisition - allows sale of product into existing customers, adds to breadth of product range, XRF provides customer certainty vs a lesser known/small company

OTHER POINTS

• Decarbonisation - XRF has exposure through metals which are required in the manufacture of products eg. Lithium, copper

INVESTMENT THESIS

• Exposure to the broad mining and materials sectors via the critical sampling process - not restricted to one mineral but to the sector as a whole
• Sampling process is mandatory, non-discretionary - ongoing need for consumables, sticky customers
• Flywheel of (1) reputation (2) breadth of products (3) high quality (4) innovation via new products (5) patented formulations - ensures retention of, and sticky, customers - ability to pass on higher costs
• Many ways to win via different, but complementary product lines - respond to newer technologies and R&D focus to release new products
• Global leader, very few competitors that can compete on service, quality, cost and turnaround time
• PE 19.9x, very high quality earnings, 

RISKS

• Capital Spend and/or acquisitions that do not make sense against product suite or strategy or that will bog the company down in integration into existing operations
• Loss of key customers, bad press on bad quality impacting customer sampling process
• Emergence of competitors which have the ability to replicate XRF’s competitive advantage
• Slowdown in R&D focus
• Slowing growth and/or margin