Joining us as we get into the afternoon of the second day of our 44th annual Growth Conference. Very pleased to introduce a company I've been trying to get down to this conference for a number of years now, and so for timing reasons, able to make it this year. So thrilled to introduce Computer Modelling Group, more commonly known as CMG. It's a company that started as a, well, a supplier of software to the energy sector, is now evolving in, I think, what we're calling CMG 4.0, into also a consolidator of other technologies and services into both the energy sector and adjacent sectors. And so the architect of that strategy is Pramod Jain, who I'd like to welcome to the stage. He's gonna tell you a little bit about CMG, and then we'll have time for questions after.
Over to you.
Thank you. Thank you, Doug. Great to be here. I'll start off with this intro slide and read this, the text. "Imagine showing up to work every day and having to do your job with a blindfold on." And I think it's a radical thought, likely implausible for anyone in any industry, but not for the engineers in the energy sector, because they've been tasked to devise systems and methods to extract oil and gas from underground reservoirs, or to safely inject carbon dioxide deep inside the ground, or to manage geothermal or hydrogen projects as a part of energy transition, and they do it every day. The subsurface is a very complex puzzle because the interaction of the Earth with fluids, the oil and gas, becomes very, very complicated.
These engineers have to predict a lot of outputs or outcomes just based on a lot of hit and trials and making decisions, multi-million dollar decisions, billion-dollar decisions. So how do they do it with a blind, blindfold on? Simulation software. So that, that's where CMG come in. So my name is Pramod Jain. I'm the CEO of Computer Modelling Group. A little bit of history of CMG. We started in 1978 as a research foundation coming from University of Calgary. Fast forward 45 years, we went public in 1998, and we have eight global locations throughout the world. We have close to 650 customers, 450 oil and gas companies. Top nine out of top 10 producers, oil producers in the world, are CMG clients.
What we have done in this last 45 years, again, starting from Calgary, Canada, we have helped the Canadian clients in extracting heavy oil from Canadian oil sands. That's how our reputation started. So think about the complexity with which CMG grew. And since then, we have expanded ourselves into solving real complicated problems in US shale market, to Venezuela, to Middle East, to Southeast Asia, a very global presence. And the stuff that we're talking about that CMG solves for is built on physics, petroleum engineering, high-performance computing, a lot of software architects. Everything comes together to ensure that our simulators can model and create different, different plans for the, for the engineers. Some of the use cases listed over here, whether that's a black oil asset.
What I mean by black oil really is as simple as extracting oil from a conventional field, where you put a straw in a desert, oil comes out. That's conventional, which is traditional way of doing things. Or going into oil sands, or going into Permian Shale Basin, where you have to apply much more complexity to extract oil and gas. What we have seen as well in the recent years, a lot more focus on energy transition, and energy transition is a big umbrella. We all have a duty to towards the net zero, and one of the key aspects of net zero is carbon emission control. So carbon capture and storage is something that you hear a lot as a key lever of energy transition.
The beauty of our products is that the same concept that has been used, carbon dioxide used to extract oil and gas as an Enhanced Oil Recovery, is now repurposed to now ensure that whenever you capture carbon dioxide, you're able to ship it to a location, and then you store it, and then you made sure it never leaks in the environment, because that's a risk mitigation strategy. So, so lots of use cases, and Geothermal and Hydrogen are very much in the infancy stages, but they are going to become key parcel of the Energy Transition strategy, and CMG is well positioned not only on the oil and gas exploration side, Brownfield side, but also on the Energy Transition side.
So I joined the company May 2022, so close to two years now, north of two years, and it was a perfect time for me to come and join this business. CMG always has been phenomenal in terms of the market presence and the problems that we solve, a great brand reputation in the market, but it was right at the cusp of intersection of growth. Doug kind of introduced in the beginning that this is a business where if you apply certain best practices of software companies, you can take a great product, commercialize it, kickstart the organic growth, and then you can start to see wonders coming out of it. To do the strategy work on CMG, a couple of things that was spent from my side to ensure that we are understanding the market trends in this place.
So the first one that I will talk about is digitization. Now, you must have heard digital transformation a lot. I can tell you, coming from a very different sector to now energy sector, this industry is way behind. Even though it's very data intensive, it's way behind in its journey on digital transformation. When doing a market research, speaking to customers, what we hear fit for purpose workflows. We hear artificial intelligence, we hear GPUs, we hear deep learning, machine learning, easy to use intuitive UI. And all these tech words, tech jargons, or buzzwords that you hear a lot, is now being spoken by the most senior executive in an oil and gas company or at a grassroot level, engineer level. So that tells me that digitization is near. Digital transformation is, is real, which will help this industry to scale and move forward.
The second trend that we explored was talent. This industry is very cyclical. It has gone through lots of ups and downs, but the last downturn that happened in 2014, 2015, we saw a exodus of talent. A lot of experienced engineers moved out of the industry, a lot less engineers came inside and starting to graduate in universities. Why? Because oil and gas became a taboo, right? So it became more of a oil and gas is bad, you should not invest your time and energy into it. So we started seeing less graduates coming off it. Fast forward now, when the industry is back on the upward side, you need those engineers now. You need that talent. It's not just about the software play. How do you, how do you combine the software and services together to create a solution?
So the solution-based approach was the second trend that we saw. The third trend I would highlight is easy oil is gone. You have to believe that the days of putting a straw and oil comes out is gone, so you will have to rely a lot on brownfield operations. What I mean by that is you have your existing asset, and again, just for understanding, any asset, the maximum recovery rate you can do is 30%, 35%, but normally you're operating at 10% or 15% of recovery rate. So you've been asked, there's a lot of policies and lots of stringent rules about new exploration.
It's about take what you have and make more from it, which means brownfield operations is gonna continue to rise, easy oil disappears, and that for that, simulation is the tool to extract the last drop of oil in this regard. The fourth trend is energy transition that I spoke about. Energy transition for net zero goals, carbon capture storage is one of the immediate levers that's available because it requires the same level of skill set, it requires the same level of infrastructure. You have pipelines already built, so if you are taking CO2 from a location, transporting into a storage site, you will rely on those skills and infrastructure to make it happen. So that, that came out loud and clear. Hydrogen, again, is in a very early stage, but a very viable option for the future, to come.
The fifth trend that we saw was departmental silos. Two departments, you have subsurface department, which is the reservoir engineers, then you have production engineers. They don't talk, and I think that's very applicable to any industry that we go in, because departments really don't care about other departments. So who cares about it is the asset manager or someone on the top who brings all this together. So there is now a notion or a trend in the market that can technology help break the silos? Can technology give me the single version of truth? So that's another trend that we saw, and hence our investment into a product called CoFlow over the years to tackle that.
Because of this understanding of these five trends, we put together a strategy, and we have labeled that as CMG 4.0 strategy, just for the reason that there's a lot of transformation that needs to happen to turn a research, research-led company into a market-led company. I have the honor of being the fourth CEO of the business, hence the label CMG 4.0. So what's inside? What's inside the strategy? In a nutshell, what we are trying to focus on is we are bringing back, we're turbocharging the organic growth, and there's a lot inside when I mean organic growth rate, because the company got affected because of downturn in the industry from 2014 onwards till 2022. And my timing was a perfect intersection of me coming because oil prices started to rise as well.
But when you run a business, like a proper software business, a lot needs to go in. The first one that's super important is, do you really understand your customers? You have got to be customer-centric. Any great software business knows their customer very well. This is a business where you don't have thousands and thousands of end customers. You're talking about thousands of oil and gas companies that really matter. So it's a constant game of upselling and cross-selling in this business. To upsell, you need to understand the revenue profile over the last 10 years or so, and we have that data because each of these customers have been part of CMG family for a long, long time.
So one of the key lever for organic growth we thought about was, let's understand the customer, let's understand customer segmentation, because a customer in South America will be very different from a customer in Southeast Asia, which will then drive our pricing strategy. Pricing is a key component of our organic growth because that hits the top line as well as the bottom line. You just have to be thoughtful about it. You can't just use the inflation card and increase prices without no rhyme or reason, or you're gonna start losing customers. So that's, that's an impact over there. The second part is right R&D allocation. A lot of times what happens in research companies, science, scientific-based companies, is that you have very smart people. They have PhDs, and they build products, which gives you the reputation.
But if you over-index that, what happens is that you start building products for yourself, and then you hope and expect somebody's gonna buy. And this is a common trend I have seen in my journey in a lot of different companies around it. So making sure that you keep the innovation alive, but you're able to rightly look at where is the R&D dollars going in. And that was another key lever that we pulled in to make sure that we are deploying capital to ensure we are building once and deploying many. That's, that's important.
The third aspect of that is sales. For any mature product which has been in the industry for that long and has a strong market reputation, you've got to believe that sales should be easy. But oftentimes, what you find is that sales team is quite slim compared to the rest of the organization.
So how do you make sure that you have the right salespeople, right accounts people, whose job is to constantly grow the share of wallet or go after new geographies or new logos? Plenty of low-hanging fruits in this particular area. The fourth piece I will highlight is culture. It will be surprising for you to hear that a lot of companies operate without set goals. What is the North Star? And then, if the company does not have key defined goals, then the team does not have key defined goals. If the team does not have that, then the individual don't have. So one of the things that we have established over the last two years is very much objective-based KPIs, and we are measuring the team performance and the individual performance, and the compensation is tied accordingly as well.
Because if you are going on a growth charter, you want to make sure everybody is in it, and everybody gets to enjoy the ride of the growth that comes with it. What is important is profitability. You don't want to go on a growth cycle and forget the attractive margins this business has produced over the years. The business have always run very well. It has been always north of 40% on an operating profit perspective. When I came in, yes, we have made, made certain investments, but we have restructured the dollars to ensure that we invest in M&A, we invest in HR, we invest in marketing, we invest in sales. Important investments by right-sizing different types of organization to get the profitability going. Because if we improve profitability, that drives free cash flow generation.
Free cash flow generation then allows us to start looking at our acquisition strategy, which is very important for our journey of CMG 4.0. Our performance to date, again, it's very early days. It's two years that we have been on the journey of CMG 4.0. But as you see in the numbers, what we have done over the last two years from an organic growth perspective, CMG alone, CMG segment, we've done top line growth of 12% and 19%. The thing that keeps me up at night and making sure is that we constantly deliver to that organic growth of north of 10%, because the company runs at a close EBITDA margin, adjusted EBITDA of 45%, and we have done the EBITDA expansion along with that as well.
EBITDA to cash flow generation is close to 80% for us, and that cash becomes very important because then we can use those cash to either deploy capital for internal needs, but more importantly, for M&As. The other side of the coin is: how do you take advantage of strategic partnerships? It's not just about acquisitions. If you want to look taller, stand on the shoulder of a giant, and that's where strategic partnerships comes in. These companies that are listed on the, on this chart, tells you a lot about how customers look at partnerships, and they want a holistic solution versus a piecemeal solution. So ABB, the likes of ABB and the Kongsberg, we have done joint development with them.
Our sales team collaborate together, and when they pitch it to a customer who's looking for a full solution, we take advantage of their reach and sales and marketing channel. So that has been very, very important for us. The other thing I will highlight is the service component. The services in this industry, and not just for subsurface, is quite critical. Services don't get the same love and attention in other industries, but specific to when you have a very high science company and you have a talent crunch, you want to make sure not only you're selling software, you are handholding them in that process. The consulting becomes super important. Consulting creates stickiness for the software as well, and we have grown services business over the last two years as well, and we have seen success coming out of that on the software side as well.
Let me talk about acquisitions, because acquisitions are super important for our growth strategy. One of the things I've been very vocal and transparent about in my shareholder letters as well, is that we're not going to do acquisitions for the sake of acquisitions. It's important for us to have an acquisition strategy, an inorganic strategy. And what we have done is, we have put together an upstream portfolio or a workflow, where it talks about where does the discovery of oil and gas starts, and where does that finish, at least in the upstream level. So from seismic to economics. And today, CMG sits on a middle side in terms of reservoir simulation and production, but what new technologies we can bet on?
The technologies that might be in early stages but needs commercial lens on it, or the companies which are not well optimized, we can come over there, and we have a very high, financial hurdle rate that we apply to. We look at growth companies, and our mandate is to turbocharge the growth on all these businesses that we've taken. Two examples of that. One was a small tuck-in that we did in February 2023. This was, again, listening to the market trend, which was around data and analytics. In Permian, in Texas, Oklahoma, it's, it has become about speed. It has become about, "Give me a quick answer now." You can run simulation, but simulation might takes days, but I want an answer right now.
So to answer that, we wanted to ensure that we have a technology that we can bring in as a part of our core solutions around it. Oftentimes, we look at to say: Do we build it? Do we buy it, or do we partner it? This one fit very well for us in terms of the buying aspect, because it was the right price. We were able to get the talent, and more importantly, as we started the acquisition journey, we wanted that muscle in-house. When we did the diligence of this company, USI, we approached it as if we are approaching a $30 million acquisition, which prepared us for the next acquisition that we did, last year in September. This was a sizable acquisition for the company of our size, and we added $20 million in total revenue.
The company is a great example of how we look at acquisitions and the candidates around it. To give us some context on Blueware, and I know a lot of people can get confused with Bluewave, it's Bluware, and the technology really is state-of-the-art. It was built by somebody who had worked in Nintendo. And in gaming industry, resolution matters, the image processing matters. So when we are talking about taking pictures of the Earth, we're talking about a lot of data. I might date some of you guys, but imagine those days when you had to watch a movie, you had VHS tapes. If you have to record something, you will have hundreds of tapes around it. Think about that from a seismic perspective. All of that is stored in tapes and sits over there, and we're talking about petabytes of data.
With Bluware, what they have done is they have taken those tapes and put that on cloud. So not only you are moving the data to much more like a streaming service for Spotify, but you're able to now compress the data, keep the quality going as well. So that is what we bet on the technology. The challenge for Bluware has been is that very smart people, technologists build technology, but they don't know how to make money. And that's where we have come in, and we are starting to look at what's your product management strategy? How are you looking at sales and marketing? How are you gonna grow back to base growth in terms of your existing clients? Because the company has done a great job in product-market fit establishment.
So that's a great example where Bluware and the likes of USI, completely different contrasting acquisitions that we have done, takes us forward. So I, I mentioned about the workflow, right? So if someone asks me that, "Pramod, what do you think, about 10 years from now, what the vision will look like?" And the way I think about that is, today, we are on the upstream side, and we are solving very complex problems in the simulation and the production engineering. Plenty of white space, but they all talk to each other, and we are on that journey to fill that white space and create that great experience for the users, creating more moat for our organic growth business and turbocharging it. We want to apply the same thing for adjacent verticals as well.
We have done some research on new verticals like mining, groundwater, but again, these are new verticals for us. So we have to go eyes wide open in these sectors, and we have to make the right bet on the technology to make that happen. The last thing I would say before I open it up for questions is, the call for action I give to employees, that yes, oil and gas has been a taboo in the past, but if you look at what has happened over the last few years, energy trilemma has become a real issue. And what I mean by energy trilemma, you're talking about affordability of energy, you're talking about reliability, and you're talking about sustainability, right? We still have pockets of society, a large amount of society, which is still relying on coal as the energy, right?
You need to make sure that you're helping the oil and gas industry in terms of optimizing and reducing the carbon emission. Oil and gas is here to stay. The second aspect of that is contributing to net zero. If you want to contribute to Mother Earth in terms of making sure that you're contributing and making a difference of carbon reduction, that's the place to be. For our customers, we want to ensure that we give you a connected experience. We want to connect the platform together. No longer you have to swap screens and make multiple decisions, give you a single version of truth.
For our investors, think about a company which has done phenomenally well over the years but is now on the growth trajectory, is generating close to 45% margins, generating heavy, big cash flows, has a strong moat, with a very strong barrier of entry. What a great place to be. Thank you.
Thanks, Pramod. I'll start with a question, then maybe we'll get one from the audience here. The carbon capture side of the story is relatively new. I think in the last quarter, it was 28% of software revenue was tied to that, which is pretty substantial, given it's just in its infancy. So maybe you just wanna bring that to life. What is it that customers are paying for, doing with your software? And talk about the regulatory
Mm-hmm.
framework around that, because it seems like it's very important to the future of that.
Yeah, sure. No, I think it's a great question, and carbon capture and storage has something that surprised us in a good way. We have seen a lot of help from the governments, especially in U.S., where tax credits have been provided or subsidies are given to the companies to do more of the carbon capture work. And where we are in the journey right now, it's still in a very early stage. A lot of projects that we see right now is more about, is this location the right location to store carbon dioxide? Can you do a feasibility study on that? We're not even talking about production yet, because it takes three to five years from that initial study, getting a permit, to then starting the production. Because once production starts, you have to use the software all the time because you have to report back to authorities.
We are in a very early stage on that. Very pleasant surprise in terms of how much attention we're getting on that, but I think the real usage would be when it goes to production.
Any questions from the audience? We've got about two minutes. One more for me that has come up a lot when we've had you at marketing. You mentioned that you've switched some of the incentives, management incentives around KPIs. So maybe you just elaborate a bit on what the KPIs are now that are driving compensation for your executives.
Yes. So a couple of things we have changed in the compensation. Before I get to KPIs, what we have also done is we have looked at how do we issue equity or not issue equity. And the idea really is that, let's make that part of the P&L. If someone is getting a $ 1,000 bonus, how much of that can go towards cash, and how much of that can go towards buying on the public market? So you're still part of the equity ownership, but it's not like the company is diluting the shareholders on the equity side, which is an important change for the business. Because as you can imagine, the reaction, people love to get all of that. The KPIs are important for each business unit. So CMG goal is to generate top-line growth, double digits.
You want to ensure operating profit as well. So we are ensuring that operating profit, total software growth for the business unit level. And for the corporate team, which are involved in M&A side, we want to track on ROIC, because we have a very high hurdle rate on the IRRs, and it's important that not only we pay well for those acquisitions, we are able to run well and help improve the net income, which then drives the ROIC.
Part of the CMG acquisition strategy, I mean, I have a hard time talking about it without eventually talking about the two members from Constellation Software who sit on your board. You've hired people from Constellation Software. I know there's some changes with the board that maybe you can talk about, but, you know, they also have made acquisitions themselves in this space. And so maybe just for the benefit of the audience here, you could walk through, you know, that dynamic with Constellation.
Yeah, sure. I get this as a question a lot, and I would still say on the record is that what we are trying to build over here is not CSI. Not that CSI hasn't done phenomenally well, they have been amazing in the M&A universe, and there are a lot of great best practices that we have learned, not by just from the board members, but just listening and reading and studying them. Decentralization, new comm structure, how to look at M&A, how to evaluate the deals, for scenario modeling. There are so many things which are good about it. The things that we want are different and are trying to make a difference is, we are trying to ensure that we drive the organic growth.
We are able to stitch the businesses together when it makes sense and have a cohesive, joint go-to-market strategy around it, and that's very different from the CSI playbook, which is very much decentralized business by business. And I think as far as the board members are concerned, they're very smart people, and they have come in, and they have added a lot of value. One of them actually was involved in my hiring process as well, head of search committee, and John is no longer reelecting himself for the board, but he has done a lot of good work for us in terms of mentoring me, coaching me, and in giving those basics.
I think we are at the right intersection right now in terms of how much do we need to get operationalized and have a different story in terms of what we are trying to do with CMG 4.0.
John's not standing for election, but you've got someone from Lumine coming to replace
That's right. Yeah, so that's
Yeah.
Again, that Birgit has left, she's the one that is coming in now, and she has left Lumine Group for years now, and but she has that operational experience, which will be needed as we do M&A.
All right, well, we're up on time here, so with that, I'd like to thank Pramod for the presentation.