Capital Limited (CAPD) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Capital Limited H1 2022 results. [Operator Instructions] I would like to remind everyone that this call is being recorded. I will now hand over to Jamie Boyton, Executive Chairman of Capital Limited. Please go ahead.

Thank you very much. Thank you, everyone, for dialing in today to the Capital Limited First Half 2022 Results. I've got with me today, Giles Everist, Group CFO, and Conor Rowley, Group Investor Relations and Corporate Development, both based in London. I'll run through the slide deck. I'll skip over some of the background detail, focusing on the results. Obviously, that's the context of today's presentation, and then obviously we will have Q&A. So moving on to the highlights slide. We took things off with it's an incredibly pleasing performance for the first half, a record performance for the company. We obviously did a lot of work setting the company up over the preceding few years, positioning ourselves in West Africa, putting the foundations in place of our laboratory business. and entering full-scale earthmoving business and those moves and that positioning have really benefited the company's results, particularly in the second half of last year, and continuing on into the first half of this year. The numbers, they're there on the page in front of us, so I won't repeat too much, but we're at 40% revenue growth translating into 46% EBITDA growth, 57% adjusted net profit growth. And then the operating cash flows from the business, up very strongly in the first half of last year over 500%, noting, of course, the first half of last year is when we were establishing ourselves at the Sukari [ linear gold ] contract. Strongest results in the company's history. Returns very strong. We generated an adjusted return on capital employed of 24.6% in the first half. We maintained a quite modest net debt position of $36.4 million. And that does not obviously account for the fact that we have an investment portfolio of $47.3 million. The key thing to come out of today's results is that we had previously guided the market to revenue for this calendar year of $270 million to $280 million. And today, we have, along with the results, increased our guidance up to $280 million to $290 million. Then Just looking through the backgrounds of the business, a fully integrated multi-disciplined service provider to exploration and mining companies across Africa and in the case of our laboratory business in the Americas. This map obviously profiles the major projects that we're currently working on a heavy reliance on contracts at mine sites, and the largest fleet of rigs in the African continent and a growing presence in both heavy mining equipment and laboratory businesses. The slide deck today is the full slide deck we'll be using in the investor marketing. I just point out a couple of the key thematics. And we certainly had 1 thing that was, I suppose, different in the first half of this year to the second half of last year as we saw increased volatility, particularly in Q2. However, as you saw the numbers still reflecting an incredibly strong performance. And despite the volatility, we're still operating in a market, and demand environment is highly supportive. Continuing to see metal prices trading at decade highs, and exploration spend to low the 40% below previous peak cycle levels. And the same thing holds for the CapEx cycle as well. So again, whilst there has been some volatility, particularly in Q2, the demand environment has continued to be very strong across all of our services. Going into each of the individual business unit performances. The drilling business has just continued to go from strength to strength. And in fact, we did pre-release the revenue results in mid-July, our Q2 fleet utilization of 85%. That's the strongest utilization that we've had in our drilling business since the IPO back in 2010. And we're seeing demand across the board, an improving pricing environment, rate environment. And we're using that demand as an opportunity at the moment to actually reposition and consolidate our operations. So I think this is an important point to bring out. We announced contract wins in H1 with Kibali for our laboratory business. And more recently, for our drilling business for Fekola. So as you can see the visual there on the left, we're now operating in 5 of the largest -- 5 of the top 10 gold mines in the African continent, noting that we don't actually do business in Burkina Faso and Ghana. So in the territories where we do business, we're in 5 of the top 6. Further to that, we have started drilling at Leo Lithium, which is going to be one of the world's top 5 spodumene producers globally. That's in Mali. We've started drilling Kabanga Nickel project, one of the largest undeveloped nickel sulfide deposits in the world. And also working at the Bankan project, which we're also a shareholder of, which is an emerging major gold discovery last reported number of about 4.3 million ounces. So the message we're really delivering to investors today is that whilst the demand is extremely strong, we are using this now as an opportunity to review contracts, decrease our exposure to smaller-scale contracts single-asset contracts, consolidating to larger contracts and continuing to target the top-tier customer base to expand our business. The mining business, 2 contracts were operated across the first half, 1 in [ Ivory Crest ]at [ Venecian ], the other Sukari, the big one being the Sukari contract. The contract continues to performed exceptionally well, meeting all our expectations performing above contracted volumes. And the performance has really now -- we've been running a contract for about 15 months, we reached full run rate in late Q3 last year, and it continues to go strength to strength. The tendering market for the mining opportunities is longer-dated cycle obviously, however, still many opportunities presenting themselves. We're very selective about the ones we can go for, but continue to see a lot of opportunity for our mining business. Our laboratory business going from strength to strength. We have actually started to increase our level of disclosure as the business gets a bit more critical mass within capital. And obviously, in the first half, we announced an extension of our existing range [ Côte d’Ivoire ] where we'd already announced an arrangement to roll out 6 units, which are going to be rolled out over the course of 2022. We recently announced an extension to that agreement to roll out a further 15 units, taking total to 21 units over the next few years out to 2025. And we've also given some revenue guidance on this business longer term longer-dated revenue guidance, but the business is, again, going from strength to strength secured major contracts in the recent period with Kibali that I mentioned earlier, the contract renewal in Tasiat, which just sits outside of that at the top 10. I think it's #11 in Africa for the significant gold mines in the business, again, performing very well. Investments. We released a fair bit around our investment portfolio in the July revenue release. Obviously, we had some volatility in the portfolio, particularly in May and June, however, significantly outperformed broader market. And we're continuing to develop some solid relationships with customers, and generate some very good revenue of what is a highly effective business development tool. In fact, for the half year annualized $53 million of our revenue base coming from investee companies. Again, we disclosed a lot of this with the revenue results, but we were a net seller of investments in the first half of $2.6 million in the portfolio at June 30, $47.3 million. Since we initiated this strategy formalize the strategy so 2019, we generated a 300% return. The invested capital is just a little bit over $11 million, and that's a compound return back 50% since inception. Moving on to the results themselves. Again, very strong performance across the board. Obviously, adjusted net profit represents the operating business as opposed to the net profit encapsulating the investment portfolio. We're still operating at very strong margins, EBITDA of 30%. EBIT of 20%. We have previously guided that 25% to 30% EBITDA margins is our target range. So we're still trading at the top end of that range. We had a bit of an anomaly, which was previously communicated in the second half of last year, which corrected itself in H1, but still operating at the upper end of our target margin then -- the net cash order flow, I won't run through this in greater detail. But as you can see, strong EBITDA. CapEx was $22.6 million in the first half, and we finished with -- sorry first half investments of $47.3 million. And with our investments, we finished the period in the net cash position on net debt without the investments. More critically, on the CapEx side, we had previously guided the market to CapEx of $45 million. The market was sitting at $48 million. We have today upgraded our CapEx guidance. We've moved the guidance range to $50 million to $55 million. We're actually shared a little more detail about the sustaining CapEx of the business because we'll just give analysts a bit sense of sustaining run rate. You are now talking about with a significantly larger business in 2019. We turned over thing about $115 million. We're now looking at $280 million to $290 million this year. Sustaining CapEx is moving to the $30-odd million range. The increase in CapEx in this year's guidance is essentially around higher rig utilization than we previously guided, which obviously leads to higher sustaining CapEx for the operating fleet and the addition of a further few rigs which are coming in for fleet replacement as we lock in further long-term contracts, the most significant of which was the GEITA contract that we announced recently. As mentioned earlier, balance sheet, still maintaining a pretty modest gearing level. Net debt to equity is [ 16.4% ] at the end of the first half, and net cash when you incorporate the investment portfolio. In the bottom left, we've broken down the gross debt composition, noting that the majority is amortizing debt, specifically Epiroc Sandvik and Macquarie 26% of the debt is a revolver. We've also declared today an interim dividend for the first half of $0.013 per share. That's an 8% increase on the first -- on the corresponding period last year. Dividend policy remains consistent with prior reported policies, and the dates for the dividend timetable are in the bottom right-hand side of this Slide 20. So outlook and guidance. Critical, obviously. What we continue to say is that this continues to be a highly supported commodity price and commodity demand environment. notwithstanding the volatility that is indeed the market in recent months. Generally, the balance sheet of the majors, in particular, our target customer is an extremely healthy condition. And we're still seeing gold in particular, the majority of our exposure trading at around the $1,800 ounce level, which is highly supportive for increased exploration and capital spending. The demand from -- strategic demand, structural demand from transitioning into battery metals is something that is a new revenue driver for the company. We've now got exposure to nickel projects, lithium projects, copper projects, and we're seeing increased demand for those types of commodities. So a very strong demand environment, led to an increase in our revenue guidance. The other numbers are really covered already CapEx guidance as well of $50 million to $55 million. With that, I'll hand back for Q&A. Thank you.

[Operator Instructions] We will take our first question from Richard Hatch of Berenberg.

Jamie and team, congrats on the numbers. I've got 3 questions. The first one is, Jamie, can you perhaps just give us a bit more sort of color and flavor on what's going on in the business development angle, particularly in capital mining? Just be interested to know what the opportunities you're seeing there? And any hopes to -- for any new sort of contract announcements in addition to the Sukari contract? That's the first one. The second one is just on the numbers. Just noting that the increase in inventory, which I guess is part of what's going on with [ avian ] part of a growing business, but any kind of targets there to try and drag back some of that working capital build, particularly in inventory. And then the third one is I just note this morning that a couple of your competitors were engaging in M&A, although it's not been successful at this point. I just wonder what your view is on any sort of M&A opportunities that you're seeing in the space to kind of provide additional scale in a step change for the company through M&A?

There's an interesting connection between your first question and your last question. And the connection is the M&A activity, which I imagine is predominantly around Australian earthmoving contractors. And what that is -- I mean I'm going to tackle the third first. What that is telling you there's 2 very clear thematics coming out of Australia, in particular, where the majority of our peers are listed. One is an increase in prevalence in buybacks. We've seen probably somewhere close to half a dozen companies announced buybacks. And the second is M&A starting to happen in that M&A, in my opinion, in our opinion, reflects a tight market for both people and equipment and depressed valuation. So you're starting to see valuations improve. You're starting to see buybacks in active, and you're starting to see corporate activity due to a lack of longer lead times on equipment and a lack of access to debt field operators, all of which are highly positive signs reflective of the valuation and demand within the services sector. When I reflect that back to your first question, the BD around the mining business look, it is something we get asked. There's 2 main points I'd like to get across is the first is the mining business development sales cycle is a lot longer than drilling, stating the obvious. And what the opportunities that we have seen in the last 18 months since commencing big awards at Sukari have not been as a compelling enough nature were up or what we saw is within our wheelhouse with respect to our returns targets for us to chase is particularly hard. Now as contracts are awarded, and our almost predominantly small scale in nature, that is taking access equipment out of the market, which is leading to an improving rate environment on the next round of tenders, making them more attractive. So I would say that we are engaged on a number of opportunities. But unlike our peers, we don't have to win just drilling. We don't have to win [ blocks ]. We don't have to win mining. We will win the contracts to satisfy all the criteria, returns, risk profile, customer profile, country profile, et cetera. We can -- we do -- we're afforded the luxury, so to speak, being able to choose between multiple services and which contracts tick all the boxes. But it's still a very strong demand market as it is across all of the business field. With respect to your question about inventory, there was inventory built in the first half. We actually had a call last night, Giles and I with the team. We are internally expecting a level of that to get released over the second half. I won't quantify a number. Hats off to, I think, to our operating team, while the inventory build was pretty ruthless. It was a decent size number in the first half that was 100% result of the war in Ukraine, supply chains getting constrained, making sure we got ahead of that, early inventory, hit the ships to make sure we didn't have any supply disruptions, and those results tell you that they achieve those goals very well.

We'll take the next question from Andrew Breichmanas of Stifel.

Two questions for me. First, you talked about the buoyant tender pipeline. But I was wondering if we could just get a bit more granularity on what you're seeing, particularly on the drilling side because the aggregate data for the sector seems to suggest a weakening of activity in June and July. So is the demand you're seeing more reflective of the locations you're operating in, and your client relationships in? And does that commentary suggests that you're starting to get some visibility past the rainy season and into 2023. So that's the first question. And the second question just relates to your approach to shareholder returns. I think you mentioned that your dividend policy continues to target returning up to 20% of NPAT. So there's some discretion in that policy. So I was hoping to understand some of the considerations that go into setting the path. And secondly, you just mentioned buybacks by some of your peers. You've completed a program at the start of the year, but I just wanted to see how further buybacks could contribute to your shareholder returns policy going forward.

Demand. Let me tackle that first. We're very positive about demand. I note you're quite right. When you look at -- there's a number of lead indicators that we always look at. Metal price has obviously been very significant capital at activity being another one, and capital markets activity has been impacted with the reasonable. So as I sit here today, I am very aware and we are cognizant of that and nothing in the junior end of the market, it will show up. It's getting more difficult, whether that's a sustained difficulty. However, it has been more difficult in recent times for the juniors to raise money. But in answering your question, that's not our market. We have exposure to mid-tiers blue chips mine sites. We have both eyes into exploration sites. And therefore, the demand we're continuing to see is from those larger clients that are still operating in a very strong environment, and now having really established ourselves as a larger scale player. What is particularly pleasing is that the opportunity sets in front of us are very often 5, 6 up to 10 rig opportunities. We're not talking about 1 or 2 rig opportunities. So again, has the ability to be more meaningful to the group. I hope that sort of answered the question. So there is volatility is impacting the juniors, but we're not seeing particularly in the top-tier assets, thus the strategy. Within our policy framework, yes, it is broad. It's a subjective. [indiscernible] its high level of discourse between the Board, we'll look at buy backs. We'll look at dividends. We look at the capital demands from the business itself. We look at our gearing levels. So all those things come into play, as you would fully expect. It's a bit of a blind answer, but there's a lot of things to consider. And clearly, we're in a period of capital intensity. We have been for the last few years as revenue has really taken off over the -- particularly over the last 2 years. So all options remain on the table. But Conor and Giles, you might just want to answer what the aggregate payout based on the buyback and dividend yield. Can it improve?

Yes. Sure, Jamie. So I mean, if you combine the buyback and the divi, you're around about 4.5% yield, currently. So pretty strong yield.

The next question is from Alex Bedwany of Canaccord Genuity.

Jamie, can you hear me?

Yes, I can hear you fine.

Great. Two questions from me this morning. So first is just how you guys are thinking about your efficient debt level and repayments going forward. So I note that on a net debt-to-EBITDA basis. So the multiple you guys are less indebted than your peers to how much further do you think you'll sort of go with debt repayments and whether you think the efficient level sort of hit, whether it's into the short, medium or long term? That's the first question. The second question is just around cost inflation. So obviously, you've got some significant rise in form mechanisms in your contract. I just wanted to get a sense sort of ballpark sense of how much of your cost base is actually protected by that. So the industry has sort of seen 20% cost inflation, then how much of that will actually impact your EBITDA margin?

Cost inflation, the major contracts have rise in full mechanisms embedded within them. probably talking in the vicinity of 60% to 70% of our contracts have embedded rise in full. The balance of the contracts you have mechanisms that allow for renegotiation. So look, there is absolutely cost inflation in the system. We've been quite open about that wage inflation, shipping inflation, take those sorts of costs. But we've largely been able to mitigate those cost pressures and pass those cost rates off. And in fact, to the point operating we said at the time, the H2 margin last year was out by sort of a perfect storm of events. We have been quite consistent, saying, 25% to 30% is our target range. We're right at the top of that band. So that in itself, I think, would indicate that largely we're managing to pass on cost inflation. But we are also using that cost inflation and real cost inflation. And obviously, if some clients are not willing to look at that. And obviously, we've got to look at where we're going to generate returns for our shareholders, and that is part of our consolidation phase and repositioning that we're going through currently. Giles, I'm going to let you handle the debt question, if I could [indiscernible].

Yes, sure. So you're absolutely right. I mean, at the moment, our gearing levels are relatively modest. Our debt-to-equity is 16%, and leverage ratio below 0.5x. I think most of our peers are around about the 1x leverage or higher. I think in terms of comfort, we would perhaps look to go to about 1x on a leverage ratio. So based on current EBITDA for the half, that might suggest that there's around about $40 million of additional debt that we would potentially use to fund further growth.

We have no further questions through the audio lines. I will now hand over to Conor Rowley, Capital's Investor Relations and Corporate Development Manager, to run through the Q&A submitted through the webcast page. Thank you.

Thank you. And thanks, everyone, for sending your questions. It's been a number of. I'm not going to repeat any that have already been addressed at a number of you asked about the buyback. I think one question, I'll start with a bit more general, Jamie, is just on -- we talked a lot about wanting to move to larger scale drilling projects. Can you talk about the advantages of those, of growing larger scale? And also any disadvantages that come with it.