Imdex increases profits by 69% in 2006-07

West Perth-based Imdex Ltd has reported a 69 per cent increase in net profit for the 2006-07 financial year, making $12.7 million, the company has announced.

The full text of a company announcement is pasted below

Imdex Limited (ASX:IMD), the Perth-based drilling products and services group, has reported a 69% increase in net profit for the year ended June 2007.

The sharp improvement in earnings reflected the combined impact of continuing strong demand for its products and the major strategic initiatives undertaken in the past two years to position the business in the international marketplace.

• Revenue rose 79% from $66.8 million in FY06 to $119.3 million.
• Net profit after tax from normal operations rose from $7.0 million in FY06 to $12.7 million.
• The current and prior period results have been impacted by non operational items. Including these non operational items, the company's net profit after tax rose from $8.0 million to $13.5 million.
• Earnings per share of 8.74 cents were 44% higher than a year ago.

Reflecting the improved operational outcomes, the directors have increased the final dividend, payable in October 2007, from 1 cent per share paid as a final dividend in FY06 to 1.5 cents per share. The 50% increase in the final dividend takes the dividend for the full year to 2.5 cents, fully franked, compared with 2.0 cents, fully franked, a year earlier.

HIGHLIGHTS

The results for FY07 demonstrate the considerable progress during the year towards the company's key goals of:

• continuing operational earnings improvement within Australia;
• moving towards an increasing global presence;
• achieving an overall improvement in Group financial performance to make Imdex a competitive investment in the Australian market; and
• translating the improved performance into dividend income for shareholders.

The highlights over the past year have been:

• growth in total operational earnings before interest, tax and amortisation (EBITA) of 116% to $25.8 million;
• the better than expected performance of Chardec and Reflex during their first 11 months as part of the Imdex Group;
• acquisition of Swedish-based Flexit;
• acquisition of Canadian-based Poly-Drill Drilling Systems;
• acquisition of a 75% interest in Kazakhstan-based Suay Energy Services;
• a capital raising of $16.5 million to assist in funding the company's growth strategy;
• net cash flow from operations of $16.1 million; and
• an increase in the dividend payment.

BUSINESS PERFORMANCE

All business units made strong profit gains during FY07. By the end of the year, the company had established a global presence with its operating divisions represented in all key mining and exploration regions in the world.

Drilling Fluids and Chemicals Division

The Drilling Fluids and Chemicals division (DFC) comprises the Australian Mud Company (AMC) and Samchem Drilling Fluids and Chemicals (Samchem). AMC is based in Perth, Western Australia and Samchem is based in Johannesburg, South Africa.

These businesses focus on the provision of drilling fluids and chemicals to the mining, oil and gas, water well and horizontal directional drilling industries. Fluids and chemicals are required in the drilling process primarily to cool and lubricate the drill bit, keep the hole open and to return cuttings to the surface.

DFC has grown organically in the current year with revenue increasing 50% to $62.4 million ($41.7 million in FY06) and operational EBITA has increased 82% to $10.4 million ($5.7 million in FY06).

The DFC trading results have benefited from buoyancy in the worldwide resources and energy markets. These market conditions have led to strong growth in exploration and development expenditure, particularly in Australia, Africa and Asia.

As well as expanding sales in Australia, DFC has increased its market penetration in Africa and South East Asia. DFC products are now sold to over 30 countries worldwide.

Drilling Products and Services Division

The Drilling Products and Services division (DPS) is made up of:

• the Reflex Group of companies (Reflex);
• Chardec Technologies Ltd (Chardec);
• the Flexit Group of companies (Flexit);
• Ace Drilling Supplies (Ace); and,
• Surtron Technologies Pty Ltd and Surtron Technologies UK Pty Ltd (Surtron).

These businesses provide a range of drilling products and services globally, including:

• directional steering services to the coal bed methane industry;
• geophysical logging services to the iron ore industry;
• down hole surveying services to the gold and base metals industry; and,
• technologically advanced down hole instrumentation tools.

Divisional revenue increased 124% to $56.1 million ($25.0 million in FY06). Divisional EBITA increased 235% to $17.6 million ($5.3 million in FY06).

The strong growth in this division during the year reflected the acquisitions of Reflex, Chardec and Flexit. However, the existing Ace and Surtron business units also delivered outstanding increases in profitability through organic growth within their market segments.

Key drivers in the success of DPS were:

• the continued international roll out of the Ace Core Tool, with particularly strong revenue growth coming from Canada;
• cost savings from integration of the Reflex and Chardec general management and administration functions;
• lower costs from taking advantage of the technical skills across previously separate companies to allow a streamlined focus on product development; and,
• new contracts for Surtron in Australia as well as growth offshore with additional work in China, Mauritania and the United Kingdom.

RECENT ACQUISITIONS

To extend its global reach and broaden the range and quality of the products and services it is able to offer, the company has made a number of acquisitions recently as discussed below.

These acquisitions are an important part of the strategy to support global alliances with major international drilling and supply companies.

Flexit

The Swedish-based Flexit Group, acquired with effect from 1 May 2007, focuses on the technologically advanced down hole survey tool market. Flexit is particularly active in Canada, South America and Africa. The acquisition complements the existing Reflex and Chardec businesses while giving Imdex access to a new generation of market leading micro-electromechanical systems gyro technology.

Flexit was valued at $22 million. The purchase price was made up of a $12 million cash payment on settlement and a $10 million issue of Imdex shares, or a combination of cash and shares to the value of $10 million, deferred until 2009.

Poly-Drill

Calgary based Poly-Drill Drilling Systems Limited was acquired with effect from 1 July 2007.

This company, which will be reported within the Drilling Fluids and Chemicals Division of Imdex, manufactures and sells polymer drilling fluid based systems and solids control systems.

The fluid systems developed by Poly-Drill enable drilling without the use of numerous conventional drilling fluid products, such as fluid loss control additives and gels. The fluid systems are in use throughout North America and have established new standards in drilling fluid technology.

Poly-Drill is in the process of commercialising a solids control system for the removal of oil from drill cuttings. Many countries require oil cuttings/sludge from oilfield drilling activities to be removed and some countries are seeking to enforce a zero impact policy for environmental protection reasons. This will provide exciting new markets for the Poly-Drill solids control equipment complementing the existing range of Imdex group products.

The Poly-Drill acquisition will facilitate the further global expansion of Imdex as it aims to become a significant drilling fluids and chemicals supplier to the mining, oil and gas and water well industries in North America and a leading provider of solids control equipment globally.

Poly-Drill was purchased for $3.5 million of which half was paid in cash with the balance comprising Imdex shares. The shares are subject to voluntary escrow for a period of 12 months.

Suay

A 75% interest in Suay Energy Services LLP (Suay) was acquired with effect from 1 July 2007.

Suay provides services to the Kazakhstan oilfields in the Caspian Sea region.

Kazakhstan has a fast developing oil and gas industry.

According to the US Department of Energy, since 2000, the countries with the largest net increases in estimated proven oil reserves have been Canada (174 billion barrels), Iran (46.6 billion barrels) and Kazakhstan (24.6 billion barrels).

Suay complements the existing businesses of Imdex facilitating its global expansion and offering an excellent platform for expansion in this highly prospective oil and gas region. The business will offer advantages in servicing markets in Turkmenistan, Kurdistan, Azerbaijan and Uzbekistan and the border regions of Russia.

The purchase price of US$393,000 was paid in cash with Imdex retaining the option to acquire the remaining 25% at fair value. Suay will also be reported as part of the Drilling Fluids and Chemicals Division.

Southernland S.A.

Imdex has signed a Heads of Agreement to acquire 100% of Southernland S.A., a drilling fluids manufacturer and supplier based in Santiago, Chile. A settlement date of 1 October 2007 is proposed.

The Metals Economics Group (MEG) estimate that Latin America is the world's largest exploration expenditure region, incorporating 26% of total worldwide exploration expenditure in 2006. The Southernland acquisition is complimentary to the existing Drilling Fluids and Chemicals business of Imdex and establishes a manufacturing presence in Chile with the ability to support the strategic alliances in the region and to export product into the key markets of Mexico, Chile and Peru.

Southernland is currently profitable with revenue for the 12 months ended 30 June 2007 of US$2.26 million generating EBIT of US$0.62 million.

The total cost of the transaction is US$2.55 million payable as follows:

• Cash of US$1.275 million to be paid at settlement (1 October 2007); and
• US$1.275 million in Imdex shares at an issue price determined by the closing weighted average share price on the 5 business days prior to 1 October 2007.

Such shares will be held in voluntary escrow for a period of 2 years from the date of settlement.

RTE/Imdex Joint Venture

During FY07, Imdex successfully recovered all outstanding amounts due from Rashid Trading Establishment (RTE) and sold its remaining 20% interest in Imdex Arabia to RTE. Total cash received amounted to $1.1 million. This amount has been treated as 'Other Income' in the statement of financial performance as these assets had previously been written down to a zero value.

Sino Gas & Energy Ltd

Imdex holds 13.6% of the ordinary share capital of Sino Gas & Energy Limited (SGE), an energy company operating in the coal bed methane industry in China. SGE's partner in China is Chevron. SGE is the operator in the exploration and development of three Production Sharing Contracts in the onshore Ordos Basin in northern China.

The investment in SGE which cost $0.3 million had a fair value for accounting purposes of $4.5 million at 30 June 2007.

During FY07, Imdex advanced $11.3 million to SGE as a short term facility pending the finalisation of its longer term capital raising initiatives. Interest of $0.6 million was charged on this balance. The funds advanced are secured by a fixed and floating charge over the assets held by SGE. The loan bears interest at 13.5% per annum.

In June 2007, SGE raised pre-IPO funding of A$15 million and is targeting a listing on the Australian Stock Exchange in the second half of 2007 with a further capital raising. Imdex intends to sell its investment as part of the IPO process being undertaken by SGE.

COMPANY OUTLOOK

As a service provider to the oil and gas and mining industries, Imdex will benefit from continuing growth in global demand for raw materials. Continuing strong exploration and development activity within the natural resources industry will be necessary if the industry is to meet the demands for additional supplies in the coming years.

The company's growing global presence provides the springboard for further significant earnings growth in the current year. The company's performance will also be assisted by a number of strategic alliances with major international drilling and supply companies.

The integration and growth of Suay, Poly-Drill and Southernland will be a priority.

Asian Pacific operations should grow organically as demand for products continues to be fuelled by the energy and resources needs of emerging economies in China and South East Asia.

Within Africa, the company will continue to extend its sales footprint beyond an already strong position in South Africa. The company is well positioned to benefit from higher rates of mining and exploration activity in other parts of Africa including in the emerging oilfield sector in East Africa. It is also positioning itself to take advantage of the demand for environmental management products in Africa as well as in Europe and Australia.

In the Americas, the company's expanded range of products should help consolidate its market leadership in Canada. Expansion into the United States onshore oil and gas market is a priority.

The company is confident of achieving significant market penetration in Latin America. Key markets include Mexico, Chile and Peru. A senior Chilean based manager has been appointed. Recent acquisitions will help in the plans to extend the presence of the group in this part of the world.

The emphasis on research and development including establishment of manufacturing centres of excellence in Europe and the United Kingdom will continue. This will help maintain the company's competitive edge in the provision of technologically advanced down hole tools, permitting further expansion into the oil and gas sector.

Given the acquisitions program over the last two years, Imdex is now well represented in the major mining and exploration markets worldwide. In conjunction with this acquisitions program has been the formation of alliances with major international drilling and mining supply companies operating in these regions. The main strategy in FY08 is to consolidate the business, support the alliances and launch new, improved products on to the global market.

Based on current market conditions and group structure, the directors are expecting growth in operating revenue to exceed 15% in the current year with similar operating margins to those achieved in FY07.