Mastermyne Group Limited (MYE) Earnings Call Transcript & Summary

Afternoon, everyone, and thanks for joining us on the call and allowing us to take you through the half year results for FY '22. Just starting on Page 2, talking to the Metarock executive summary. The half year has certainly been dominated by our work to establish Metarock as a specialized diversified underground mining services group. And this is part of a strategy that we've been communicating for some time around our expansion into the adjacent hard rock sector as well as bringing through our mine operations contracts. We've now established our hard rock division. And we're well progressed on our whole of mining -- whole-of-mine contracts, which is delivering stronger growth, stronger revenue and a significant uplift in margins for the entire business. The PYBAR acquisition is integrating really well. And this is a business that is strongly aligned with our core business at Mastermyne. Early integration is largely now compete -- complete. And we have 1,100 people and a strong order book with a national footprint, on completing that acquisition, and a significantly broader commodity exposure. We've also seen the coal business continue to perform really well over the half, and we've seen really strong cash generation through that business. We continue to maintain a strong market share in the coal business; and also seeing some really strong results out of the Wilson's mining business, which is our specialized ground consolidation business which we've owned for about 18 months. The order book has now grown with the acquisition of PYBAR from $1.1 billion to $1.9 billion. And as you can see in the graph on the right-hand side, the group revenue is now well on track for -- to triple over the 18-month period. And this is contracted work which we'll now focus on delivering over the next 12 months. The half year results delivered $180 million of revenue, which was up 62% on the previous corresponding period; and normalized EBITDA of $16.6 million, with some one-off adjustments to the EBITDA for Crinum and for some acquisition costs which we'll talk to you further in the presentation pack. Recent contract wins. Early in the second half, Cook mining was announced. It's a "4 plus 2 year" contract generating $70 million of revenue. And this is a really important contract, as this goes to the revenue and margin uplift that we see now locked in for FY '22 second half and also into FY '23 and beyond. We also secured the Maxwell drifts projects commencing in FY '23. And we see this as a really strong endorsement from our clients on the new larger business and a real point of differentiation when a coal and hard rock business come together to provide a unique solution for a client. Our FY '22 guidance has been revised down a little bit, predominantly because of the impacts of Crinum, and we'll talk to those in the next couple of slides, but also a bit of a softer start with the PYBAR business and the early integration performance as well, but importantly, we've included some FY '23 -- or the FY '23 guidance there of $700 million to $750 million and EBITDA of $80 million to $95 million. And I think it was important for investors to see why we're confident that the investment made in FY '22 brings a material shift in the long-term financial outcomes for the Metarock Group. And again we'll talk to those in the next couple of slides. So just turning to Page 3. This is laying out our strategy on a single page. And we've been focused for some time now in communicating to the market that we wanted to diversify our business and expand into the adjacent hard rock market, but also the other important part of our strategy has been the mine operations. And we're really pleased now to be able to say that we've executed on that strategy really well, and our focus now shifts to execution. You can see in the middle column there, starting with our coal contracting business established for 25 years. And this is a very strong part of our business with a very strong market share. It's a very stable business with very little competition in the coal market. The mine operations business is where we drive a lot of the growth going forward. And we see there the significant growth from FY '22 to FY '23 and importantly the margin uplift that will come with that. What's really driving this part of the business is these ownership changes that we're continuing to see where the large Tier 1 operators are exiting the coal space. And junior miners and investment groups are picking up these assets and don't necessarily have the capability to operate those assets. And that's creating quite a niche market for Mastermyne, who was one of very few contractors who can actually perform that work. Also see the approvals -- difficultly in attaining new greenfields approval s driving more of this work to brownfield expansion; and remnant mining, which is -- lends itself to bord and pillar mining, which is an expertise of the business, but fundamentally just mining operations generates long-term repeatable revenue with increased margins. And on the hard rock business. Again as part of the unlocking the growth in this hard rock space, the PYBAR acquisition will deliver us continued increased earnings and a national footprint and, as we say, material scale in this part of the business. And this is a business that's been operating for 28 years as a private company. And we believe that, as part of an ASX group, this now opens up further growth opportunities for the PYBAR business. And we continue to grow confidence in the hard rock space and the PYBAR business and being able to unlock the value in the PYBAR acquisition. Probably just the last point there, on we've developed quite a strong management team. We've appointed Dave Sykes as the CEO of the mine operations and Paul Green the CEO of the coal contracting business. And Nick Woolrych retains the CEO role in the hard rock contracting space. So a very strong management team that will now focus in their respective areas. Just in terms of providing an update on the Crinum accident. And as everyone is aware, there was a serious incident that resulted in a fatality underground on the 14th of September, resulting in a fatal injury to a colleague, Graham Dawson. And we've continued to remain close with the family and also to support all our people that were affected by the accident, and as you can appreciate, it's had a profound impact on our business and on our people. In parallel to that, we've been continuing to restart the project and making sure that we do that in a way that's recommencing safely and efficiently. And that's been carried out with the strong approval of the regulator, which that approval of the regulator reduces the risk in further delays. And we're confident in maintaining the schedule. Sojitz Blue remains very supportive of the operation, so the client continues to work closely with us. And we're making decisions now that are going to accelerate the schedule by investing in equipment to be able to bring forward production. And we expect production will commence in the fourth quarter of FY '22, progressively ramping up in the first quarter to 3 units by FY '23. It's just worth noting there that the fall-of-ground incident occurred in the access tunnels in a very localized area at the start of the drifts. And the geology that was the cause of the incident is not impacting the underground working areas. So the underground mining area is very different to the area that was affected by the geology in the tunnels, and as a result of that, we're confident that the mining areas underground won't be affected by the same geological impacts and the production schedule will be maintained. [ All of the ] accident has cost us about 20 weeks. The majority of that was in the completing the investigations and working with the regulator to establish the mining plan for the restart. And since we started the mining -- the restart work, that work has moved quite quickly now and gives us confidence in the dates of being able to start in the fourth quarter, but the impact of that, direct impact of the fall and the delays, has cost the business $7 million. And that's direct costs that were incurred in the first half. And there are some remaining costs in the second half and they've been reflected in the guidance for the FY '22. So whilst we have had quite an impact from this issue at Crinum, we're looking forward to this being a very strong project and with a very strong contribution to earnings and to margins from the Crinum project. I'm on Page 5 just to talk to where the, how the integration of PYBAR is going. And we're just looking here to reinforce the rationale behind this acquisition. This is a business that's highly complementary with our core business and expedites our diversification, gives us exposure to a broad suite of commodities with immediate scale and importantly 1,100 employees, with a strong position in the east coast market. And having a -- such a strong workforce in a tight labor market is a real competitive differentiator. As I said, we're looking to exploit further growth in this business by really bringing in the Mastermyne or the Metarock way of doing business. This has been a really well-run business for 28 years, but it's been somewhat constrained by being a private company. And we're already seeing clients overcoming hesitation and dealing with the company, enabling us access to larger contracts. And the recent Malabar win is a vote of confidence from our customers in that new, larger business. Probably just the other point I want to sort of talk to there is, with the acquisition, we assumed $50 million of equipment financing. And this provides us with a very specialized suite of hard rock equipment. And that equipment is all OEM-backed finance and that fleet is hired directly to the client. Since the acquisition, we have had a revaluation on the fleet. And we've seen a $13 million uplift in the valuation of that equipment from $56 million to $69 million. And probably the last point there is the strong pipeline. And this business really fits with Mastermyne's track record in acquiring private businesses and really driving the growth. And you can see, from the Wilson's mining business [Audio Gap] demonstrated our ability to take private businesses and really grow those businesses once they become part of the Metarock Group.

Thank you, Tony. I'll now step through some of the financial performance metrics on Slide 6. So as Tony mentioned, some good revenue performance. [ Say ] $180 million and a 62% increase from the prior corresponding period generated by a strong performance in the coal contracting business. Normalized EBITDA sort of mentioned there, the normalized numbers include the remedial and delay costs from Crinum for $6.8 million and also the one-off adjustments for the PYBAR transaction costs which is about $1.1 million. So normalized EBITDA margin, 9.2%, so slightly up, 0.5%, prior corresponding period. And that's due to good contract management and good management of the contracts for our margins on the coal contracting business as well. Normalized NPAT, $2.2 million. This is up by 12%. And just to note: That's also been impacted by additional depreciation. We mentioned the uplift on the equipment valuation that generates additional depreciation for the first 2 months from the PYBAR equipment, and also the amortization, both of these noncash costs, but amortization on the intangible assets also written off on the PYBAR acquisition. That's about another $1.5 million which is included in that NPAT result which is in additional amounts. Normalized EBITDA, with the adjustments, at $16.6 million, up by 70% on prior corresponding period; and normalized EBITDA (sic) [ EBITA ] at $5.6 million. I should also note the CapEx for the period. As we mentioned, to generate the revenues in '23 that we're looking at and tripling our revenue, we've got capital spend for this half which is about $19 million. Majority of that was for the Crinum CapEx to bring that project into fruition. And we'll talk further about the further CapEx spend in the second half bringing those projects into full ramp-up, as well as the Cook CapEx spend as well, in addition to our sustaining CapEx to keep the lights on and keep the overhauls going on our current equipment.

[ Yes, on ] Page 7, to touch on our safety and sustainability. Quite obviously the Crinum accident has really reinforced our commitment to our health and safety and our focus on those key features of being a highly -- a high-reliability organization. We've also made good progress in understanding the PYBAR safety management system and approach. And we see there's a lot of strong synergies and learnings in the health and safety approaches across the coal and hard rock sectors. We're already seeing numerous examples where the respective businesses have benefited from the ways that each of the businesses deal with health and safety issues, also progressing our sustainability road map as the organization continues to grow and has an increasing influence in the areas that we operate. With respect to our people, for some time, we've been talking about the significant investment that we've channeled into growing our people. And this becomes a real point of differentiation for our business, particularly with the growth pipeline that we had ahead of us -- that we have ahead of us. With the PYBAR acquisition, it certainly strengthens our leadership team. And we are seeing very much the investment in our learning development system starting to pay off with a lot of internal promotion of people. And these are people that have been with our business for a long time that are now growing into the project roles that are supporting the growth in the business moving forward. Really important is our in-house recruitment and onboarding teams. And we've got excellent track record in delivering the right people as we grow. And this is a process that was honed in the 2010 to 2013 resources boom, and we're now starting to deploy a lot of those processes back into the business now as we continue to grow Cook and Crinum and the PYBAR business. And also our underground simulators play a very important role in delivering a pipeline of employees or [ clean skin ] employees safely and efficiently across our -- not only our coal business but also our hard rock business as well. And we've got our first simulator being built in Orange, with the first trainees expected to be coming out of that simulator in about April, May this year.

Thank you, Tony. [ So we'll now ] step into the -- some more detailed financial performance metrics, starting on Slide 10. So just breaking down the segment reporting that we'll show in our financial accounts that have also been put on the ASX. So the segments are split into Mastermyne, which as we've discussed includes our coal contracting and our mine operations business; and then PYBAR being the hard rock. These are showing the normalized results against the prior corresponding period. So we've mentioned the revenue, the PYBAR contribution for the 2 months. It was the acquisition was completed in early November, so PYBAR includes 2 months of revenue in these results for $43 million. The Mastermyne revenue was up by 23% to $137 million for the 6-month period. We've mentioned the performance is impacted by initial integration issues with PYBAR, and we'll talk about that further in our divisional review on Page 21. Normalized EBITDA is up by 70% from prior corresponding period -- and as we mentioned, the normalized adjustments for the Crinum and the PYBAR acquisition costs. PYBAR contribution from November was $3.5 million of EBITDA. And the Mastermyne normalized EBITDA was up by 34%, which is quite pleasing as well. And we've mentioned the EBITDA margins; also the additional PYBAR depreciation and intangibles, as we mentioned on the previous slides. Just moving to the next slide, on Slide 11. Again this is now the step-through of just the statutory to our normalized results, just to provide the step-through. So on the left-hand column, the statutory results is as reported in our audited accounts; and the Crinum impact and the PYBAR acquisition impact, $6.8 million and $1.1 million flowing through. Moving to the next slide for cash flow, on Page 12. So really the highlight here is the strong cash flow generation from operations has really been helping to assist our first half cash payments in terms of CapEx and other investments for growth. So over the period, we've generated operating cash flow of $19.5 million. And during the period, we've made the following payments: for the PYBAR acquisition payment, which was made in November, for $11.7 million. We've made the Wilson's mining services acquisition that we made back in 2019. That had an earnout payment for the period of $2 million. We've also paid the full year dividend of $2.2 million; and also, as we mentioned, the significant capital expenditure in first half to help the transition to mine operations projects. And Crinum project was $11.5 million. And our sustaining capital spend for Mastermyne and PYBAR for the 2-month period was $7.3 million. And this just shows the strong financial discipline we have around our receivables and our working capital to make sure we've got a strong operating cash flow. It can help assist with that future investment for growth. Moving to the next slide with the balance sheet position. So first of all, across our group, we've got undrawn facilities of $117 million between equipment leasing facilities and working capital facilities, which puts us in a good position to be able to fund our mine operations projects and the capital required over the next 6 months and onwards. In terms of movements for the balance sheet between the periods, really the significant impact here is around the PYBAR acquisition and the impacts to the balance sheet. [ So as we ] mentioned, the trade receivables and inventory increases up by $52 million; property, plant and equipment, increase of $69 million. And we mentioned that's uplift in value through an independent valuation process that we performed after acquisition and as part of the acquisition accounting that moved that from -- we assumed it was a -- initial was $56 million was the book value. On valuation, that increased to $69 million, which was good to see. The average age of the fleet is in good condition and relatively short in age, 3 to 4 years. There were borrowings associated with it of approximately $50 million that came across, but this is all related to higher equipment that are actually used in projects on a day-to-day basis. And the intangibles increase [ on the ] PYBAR acquisition, it was represented by goodwill; and also by other intangibles around client relationship arrangements, client contracts, et cetera. The net debt position at December was $70.2 million. And that was a gearing ratio of about 1.5x for the half. We're targeting to come back to 1x gearing ratio by the end of '23, and we'll talk about that with our capital requirements on the next couple of slides. Equipment debt is fully backed by the equipment -- or fully supported by the equipment value. The other liabilities include the PYBAR acquisition for the deferred consideration amount, which is approximately $10 million due in November. And I've mentioned the undrawn facilities, which is split between equipment leasing which has about $65 million available -- and our working capital facilities between invoice finance facilities and overdraft is about $52 million available. The next slide is around our capital management over the next 18 months period. And so as we mentioned, half 1, we spent about $19 million on capital, predominantly on the Crinum project for $11.5 million. Half 2, we see a significant increase in our capital spend to bring the Crinum project to production and to bring the 3 units into place over the following period, into '23; and also the Cook project, which we announced last week, mining services contract, where now we'll have about $11 million of spend for that project to bring that to full production as well. Also shown there are our sustaining capital requirements for the second half and also for '23. So as you can see, the second half of '22 is a significant step-up in our capital spend but a requirement to bring those projects into fruition and generate the revenue and profitability performance in '23 that we've highlighted in our guidance. We show there that our gearing ratio steps up at June '22 to about 2.2x on a normalized EBITDA, but again we show that, that comes back to under 1x by the end of '23. So a clear path there to come back to a 1x gearing ratio, which is really the aim and one of our financial disciplines and targets we are going to achieve. And also I mentioned our current banking facilities: so fully sufficient to fund our capital project requirements into the future and -- but also looking in the future to develop capital-light strategies for any future growth projects as they arise. Next slide is our financial discipline. So I mentioned briefly about this before, but there's really 3 areas there in our efficiency, value creation and capital management. Efficiency is around delivery of our projects; making sure they deliver the outcomes that we expect, the margins we expect, so delivering target margins; keeping our overheads to a suitable level; working capital focus, so ensuring our work in progress is built efficiently and quickly and we recover our dollars and get the cash in the bank from our clients. Value creation, making sure that our contracts are flexible and work with our clients to get the outcomes that they require as well as the returns that we require. Capital investment, making sure we make sound decisions around our equipment. That gives us the advantage to secure contracts with our clients but also the opportunity to purchase and maintain countercyclically if we're required to buy equipment opportunistically. Mergers and acquisitions: We will look at acquisitions in the future that target complementary services that continue to build the geographic footprint and continue to expand our existing services. Capital management. We have a low debt tolerance. And Mastermyne have been that way in the past. And we've got a clear pathway to come back to a debt ceiling of 1x EBITDA by the end of '23; and return to a net cash position, which has been our previous capital management target in the past. Dividends: There is no dividend announced for this half, given the capital requirements that we have for the next 6 months, but looking to return to a payout ratio of 40% to 60% of NPAT after we get to the 1x EBITDA. And excess capital, maintaining a cash position of $20 million just to have that war chest and requirements as we need and look at buybacks and special dividends to return any excess as required.

So just stepping through to the divisional performance on Slide 17, just breaking down the Mastermyne and PYBAR businesses and the mine operations on Slide 17. This is the consolidated contracting and mine operations numbers, and you can see there quite a strong result from the contracting business. Probably the key point here is that we're continuing to see operations expanding, particularly in New South Wales. And we have a number of projects which are now getting close to being awarded in New South Wales, which will come through in the second half as well. As mentioned earlier, the Wilson's mining business has delivered consecutive half year of strong results. And we're continuing to build that market share in the Wilson's mining business in coal but also expanding into the underground hard rock sector as well. And we mention there the RTO business mine site, which is a really important piece of our overall strategy in being able to deliver the people pipeline; which really differentiates us from our competition, is being able to have a strong pipeline of highly qualified people coming into the operations. On Page 18, just to talk to the mine operations projects. So Crinum, significant progress, as I said, been made in terms of progressing the remediation work in the drifts but also with all the key infrastructure as well. So that's progressing quite well. And I've mentioned that the production is scheduled to commence in quarter 4 and ramping up progressively thereafter. Overhauls are all on track to meet that schedule. And importantly, the contract duration remains at 6 years, with no change to that mining schedule and that annualized revenue looking at $95 million per year from FY '23 when we ramp up to the 3 development units. Current workforce is at 71 people on site. And we'll start to see that ramp over the next 6 months, and that will grow to 180 people once the project is fully up and running. On the Cook project, we -- as Brett mentioned, that's just been announced early in the second half. And that revenue ramps up over the second half to a full run rate of $70 million per year. That infrastructure is now all being recommissioned. And you will have seen in previous announcements we talked to Phase 1 work, which was to get the mine ready for production, and all that work has now been completed. And we've actually started to actually cut coal at Cook, and that will ramp up to 3 -- to the 3 mining units over the next couple months as well. Production machines are well underway. So these are purpose-built bord and pillar miners that have been specially designed around the Cook and -- the Cook seam and the methodology that we're using which is a low-risk methodology for that operation. And similarly, with the workforce, there are 60 people now on site. And that will ramp up to 198 people. So Cook and Crinum obviously are both very important projects in terms of our FY '23 step-up in revenue and in our margins. On Page 19, the divisional overview of PYBAR, starting off with taking full control of the PYBAR business from November. So these are the November, December results; and we're only very early in the integration process. And we're already seeing some opportunities to create some further values by bringing the 2 groups together, but that's only still very much in its early stages. As we mentioned, we've been awarded the Maxwell work. We've extended a contract in Western Australia with Gwalia, St Barbara, which was a really important win for us over in the West, but we did have some softer results in November and December which were around the -- [ predominantly ] around the Thalanga project which had some ground support issues which required us to divert a lot of our production fleet, development fleet to doing ground support remediation. And that work has now been completed; and we've now moved back into development and production from sort of late January, early February. We also had an underperforming contract, which was [ known ] at the time of the acquisition, which contributed a -- sort of a bigger loss in November and December than anticipated, but importantly we're now well advanced with discussions -- on discussions with the client around resolving that. And we expect that to resolve in the second half and very early in this quarter. So of all the projects, we have had some issues at Thalanga and this -- and one other contract, but to put that in perspective: at -- of the 10 major projects, 8 of those projects are performing really well. And those scopes are expanding. And with the benefit of the involvement of the Mastermyne and Metarock Group, we're confident we'll turn these 2 projects around very quickly. And we just want to remind people that the outlook for PYBAR is very strong. This is a business that has historically had very strong performance, very strong margins. And over the next 12 months, we expect the business to be back and performing really, really strongly and growing quite quickly through into FY '23 and FY '24. Just to touch on the outlook and the pipeline on Page 21. So we're seeing our order book now at $1.9 billion. $245 million of that will be delivered in the second half, and we also have some recurring revenue which comes through as well. What's really important of the FY '23 revenue is 83% of that revenue is now under contract. And we also get quite a bit of recurring-revenue work which comes over and above that, but we can see, when we put the guidance out for FY '23, it's underpinned by a very strong book and contracts that have already been secured. And you can see the runoff there in the order book post FY '23. Pipeline currently stands at over $2 billion, so a very strong pipeline. And that's been supported by very strong commodity prices in both the coal and metals business. On Page 22, we've just laid out the order book. And you can see there the previous tenure of many of these contracts and the order book going forward. And both PYBAR and Mastermyne have very strong track records in rolling over contracts and renewing contracts. And what we have there is a very strong order book with a number of Tier 1 operators and all-good-quality contracts which support the FY '23 revenue and beyond. Just to finish up on the outlook slide on Page 23, we just want to reinforce the message that we've got very, very clear line of sight to the uplift in our revenue and margins in FY '23. You can see the EBITDA bridge there, building from where we currently are, through the mine operations and the full contribution of PYBAR for 12 months, gets us to the midpoint of that revenue for FY '23. The Mastermyne contracting business continues to travel extremely well. It's got a very strong track record. As I mentioned, we've got new contracts which we expect to bring through in the second half. Wilson's continues to perform very strongly with very strong margins. And that's all supported by the people pipeline that's being delivered through mine site. Our mine operations. We talked to the Cook announcement but also now the Crinum restart which is well progressed and very clear line of sight to the start of production in Q4. And the mine operations: Not only does it underpin a material shift in revenue, but it also underpins a material shift in the overall margins for the business as well. And our capital intensity on those project falls away from FY '23. So it's really an investment year in getting Crinum and Cook up and running. And then we see those projects move into operations; and generate very strong cash flows, operating cash flows, from those 2 projects. And the PYBAR business, again, has a very good, very strong track record in delivering revenue and profit. And we've seen that in the historical performance of the business. And we've got a very clear plan to recover the 2 underperforming contracts -- or sorry, the underperforming contract. Thalanga is now back on track. And so that's really well progressed and we're very much focused now on delivering growth. And Malabar is our first major wind for PYBAR as part of the Metarock Group, and we expect to be able to deliver more of those wins in the next 12 months. And just finishing off their with our guidance. So again reinforcing FY '22 is very much a year of investment and realizing our strategy. It's about being -- putting our strategy into action, which we've now done, invested in the equipment that's going to give us the uplift. And as we move into FY '23, you see the material shift in the business. And importantly, again reinforcing that this is work that is now contracted and our focus now quickly moves to really strong execution. And finishing off, the long-term outlook. I guess the summary of this is that we're very early in the stages of a broad mining cycle. So we've seen commodity prices remaining very strong. We believe that mining services contractors will benefit from that. We've seen many of the preproduction contractors and drilling and engineering are currently experiencing strong results. And with that, production-exposed businesses like Metarock will benefit from that current development activity. And we've seen the number of committed projects have grown sharply in recent years. And that exploration activity as well as those committed projects will lead to quite strong order books over the next couple of years. So I guess, in summing up, we're saying we're in the very early stages of a broad mining cycle. I think we're only just at the -- seeing the early stages of that. And that's been evidenced by, as I say, the committed projects and the amount of exploration work that's going on. The growth of -- the growth in our operating mines, in our hard rock mining investments has transformed our business. And as we said, FY '22 is a -- really a year of investment that underpins a significant long-term step-up in revenue and margins. And once we move into operations at both Cook and Crinum, we'll see the -- see a material step-up in our operating cash flows, which supports our capital management plan and reducing our targeted gearing ratios. And we're also, as I said, very well capitalized with undrawn facilities across leasing -- across equipment leasing and working capital facilities, so we're well positioned to get through to the second half of FY '22 before we move into that strong operation focus. And just again reinforcing our revenue in FY '23 of $700 million to $750 million and our EBITDA of $80 million to $95 million. So we'll hand back to the moderator for any questions.

[Operator Instructions] There are no questions at this time. I'll now hand back to Mr. Caruso for closing remarks.

Thank you. Again thank you, everyone, for giving us the opportunity to take you through the FY '22 results. And we look forward to catching up with many of you when we undertake the road shows in the next couple of weeks. Thank you.