Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Annual General Meeting of Mitchell Services Limited. I would now like to hand the conference over to Mitchell Services Limited Executive Chairman, Nathan Mitchell. Thank you. Please go ahead.

Good morning, ladies and gentlemen. I am Nathan Mitchell, the Executive Chairman of Mitchell Services Limited. On behalf of the Board and the staff, I'd like to welcome shareholders and guests to the company's first virtual Annual General Meeting. Thank you to those who have taken the time to participate by the online platform today. Due to the COVID -- current COVID-19 pandemic and associated travel restrictions, we, as a Board, believe that holding a virtual meeting will assist in maximizing shareholder attendance and engagement. At this stage -- at any stage during this -- today's online meeting we experience any technical issues, a short recess may be required. If this occurs, I will advise you accordingly. Today, I'm joined this morning by my follow directors, Scott Tumbridge, Peter Miller, Robert Douglas, Neal O'Connor and Peter Hudson. I'd also like to acknowledge the attendance of my alternate director, Grant Moyle; as well as our Chief Executive Officer, Andrew Elf; and Chief Financial Officer and Company Secretary, Greg Switala. As required under the provisions of the Corporations Act, also joining us this morning is Paul Sappelli from Jessups our auditors; and Isaac West from Jones Day. I note there's a quorum present online, and I declare the meeting open at 10:05. So as today's meeting, I'll deliver my annual address, which will be followed by Andrew's CEO presentation. We'll then move on to formal business, whereby the resolutions of the meeting will be put to a vote. Shareholders will have an opportunity to ask questions on each item of business through the virtual platform. [Operator Instructions] Please note that if you ask a question today, your name will be announced at the beginning of the question. If multiple shareholders ask the same question, we will announce the name of the shareholder who raised the question first. Voting on the resolutions will be conducted in the form of a virtual poll. Each security holder eligible to vote today will have opportunity to cast their vote using an electronic voting card received during online registration. If you experience any issues voting today, please refer to the online portal guide or use the helpline specified. Also note that only shareholders, proxy holders or shareholder company representatives may vote. So today, proxies have been received from 67 shareholders, representing 99,374,979 ordinary shares being 49.88% of the company's issued share capital. I will now go into my Chairman's address. Firstly, can I take this opportunity to thank every employee, every customer and every supplier for the incredible dedication, commitment and teamwork that they have shown during these difficult times. Thank you especially to all those staff members who have been affected by interstate border travel and travel restrictions and those who have had to take up accommodation in different states away from their families as a result. The health and well-being of Mitchell Services' employees, their families, our clients and the broader community remains our highest priority, and we are continually committed to doing all we can to assist in reducing the spread of the COVID-19 virus. We are working closely with government, various specialist organizations, clients and all other stakeholders to limit the spread of the virus through active preventative measures. There have been many things that we've learned during the recent pandemic, and an insight into the strength and resilience of our business model is certainly one of them. Shortly after reentering the Australian market back in late 2013, the Board had a clear strategy of multi-year, multi-rig work on established, long-term Tier 1 mines. These contracts are mostly linked to production and critical resource definition and the development stages of the mine life cycle as opposed to campaign-style greenfield exploration. It was a strategy that, amongst other things, saw the business develop an underground division of significant quality and size in a relatively short space of time. It is interesting to note that revenue from the underground drilling now accounts for over 50% of total revenue. This pivot away from exploration and towards production was also one of the many catalysts for recent strategic acquisitions to date, which have been hugely successful. It wasn't until the recent pandemic and the resulting impact on the global economy that we truly appreciated the strength of these revenue streams and the resilience of the business model. With the exception of a small number of rigs that ceased operating on a temporary basis to limit the number of people on site, the virus-related impacts on the business and its revenue streams were minimal. Throughout the pandemic, mining has been deemed essential, and given the direct link to production, so, too, the drilling services we perform. It was the strength of the business model and the revenue streams that allowed the company to maintain its FY '20 revenue and EBITDA guidance numbers throughout the pandemic period whilst also ensuring the previously announced special dividend was paid, as anticipated, on the 30 July 2020. This resilience through the pandemic as well as significant year-on-year growth, both organically and through acquisition, have contributed to a strong financial performance in FY '20 and have allowed the business to maintain its momentum from FY '19, which was a financially transformative year. The group's recorded revenue, EBITDA and operating cash flow of $175.5 million in revenue, $35 million in EBITDA and $31.2 million in cash flow, all representing significant increases on FY '19's numbers, whilst net profit after tax in FY '20 of $7.2 million was down on the FY '19 comparative of $17.4 million, it's also worth noting that the FY '19 benefited from previously unbooked deferred tax assets on carryforward tax losses, which resulted in a once off income tax credit of $4.5 million. We have continued to operate within a framework of prudent capital management, aimed at maximizing shareholder value and returns. The company paid fully franked special dividend on 30 July 2020 whilst also reducing net debt 30%. This peaked in December '19 following the Deepcore acquisition. On the acquisition front, I'm delighted with the impact that the Deepcore business has had -- has made in such a short period of time. To date, the integration of the 2 businesses has been well implemented, well managed and underpinned by an integrated strategy that aims to recognize the value of the unique businesses, their cultures and their brands. These brands and cultures have been built on the success of people within these businesses, a mandate that they have to be safe and to continually strive to find a better way. With the growing demand in gold and the resilient strength of the gold sectors in regional Victoria and in New South Wales, I'm excited about the potential growth opportunities and additional value that can be unlocked from the combined businesses. Once again, I'm extremely proud of the various safety and training initiatives that have been implemented in 2020 and of the excellent culture and safety performance that these initiatives have produced. In November last year, 2019, Mitchell Services received the 2019 Australian Prospect Mining Contract Miner of the Year. This award that recognized the company's safety and culture as a key criteria. In closing, once again, I'd like to thank all staff, all customers, all suppliers and all shareholders for all your continued support. On behalf of the Board, we thank you. That concludes my annual address. I'd like to now hand over to Andrew, who's going to give his presentation to the shareholders. Thanks, Andrew.

Thanks very much, Nathan, and welcome, ladies and gentlemen, and thanks for your attendance today. I'll just start on Page 4 of the CEO presentation and take that disclaimer as being read. Page 5, our market profile. You can see there the major holders and importantly to note the founder connection that we do have in this business with Nathan, who previously spoke, name on the door; and Scott, obviously, the founder of Deepcore; and the institutions holding 21% of the register, again, quite a few institutional holders in this business versus small cap, including Soul Pattinson and CVC amongst others. On the next page, Page 6. Nathan touched on it in regards to our COVID response, but again, just to reiterate the amount of hard work that our teams have done, and it's been an amazing effort from everybody, and we can't thank them enough. You can see there are a couple of points that talk to the impact that it's had on business about people changing rosters or people working away, and we can't thank them enough. We wouldn't have achieved those results or the results for the first quarter in '21 without that hard work. On Page 7, people and community. We've set up a Mitchell Services Foundation and really looking to give something back to the communities that we work in, and that's really important to us. We're a business that works away from the capital cities in regional centers, and certainly, we'll be getting more active in that social space as we move forward into '21. Slide 8 shows the overview and some of the numbers that Nathan touched on, but again, significant increases in revenue and EBITDA from organic and acquisition growth and a material reduction in net debt. Importantly, during the pandemic, the quality of the business model was proven, and the frank -- fully franked special dividend has now been paid 2 years in a row. And the balance sheet is in good shape, and that is going to give us flexibility as we move forward, and we'll touch on that more as we go through the presentation. From operational highlights perspective on Slide 9, we achieved our guidance and, as Nathan said, proved the quality of the business model, quality clients, quality contracts on operating mine sites. Rig utilization, marginally impacted but increasing again and the quarterly that we've recently put out demonstrates that our revenue diversity continues to improve, and there's some slides in here that I'll talk a little bit more about that. And importantly, the quality of that revenue, as we spoke about, from Tier 1 clients in excess of 90%. Slide 10 shows the impact of increased utilization on revenue over time. And you can see there are 67.7 rigs on average operating throughout the course of the FY '20 financial year. So again, a big increase there and, again, leading to that top line revenue. And we make the point there, we think that we anticipate further increases in operating rig count in '21. And again, with the quarterly that came out, that is demonstrating that. And again, that rig count will change due to seasonality or other factors. And as of today, there's about 100 rigs in the fleet. Slide 11, the quality revenue streams. Again, you can see there the bars in the top left corner with the percentages of Tier 1 revenue, large, multinational mining and energy companies, and a majority of our revenue comes from those sites. Those sites are long life, low cost that operate through the cycle, drillings related to the operational nature of those sites and continues through the cycle, and that's exactly why we targeted that business and talk to the high-quality nature of the business. We have showed a focus on the production-related drilling with the drilling that's been ongoing nature on those sites. And you can see down the bottom there, revenue by stage and the mining life cycle, those arrows. Again, 90% of our revenue is from that site-based work, and a majority of it is required as long as those sites are open and producing. Slide 12. We've just included a slide here that includes some information from our recent quarterly release. And again, strong performance in Q1. Revenue, EBITDA, operating cash flow is strong, net debt. And you can see the rig count numbers there, again, sort of reduced from March onwards a little bit and then picking back up again. And if you think about that revenue number in FY '20, it was 67.7 rigs on average, and if you look at our run rate in into '21, again, we're hoping for another strong year for the company moving forward. An additional reason for us to be optimistic moving into '21, on Page 13, and this was included in the quarterly again. The value of project financings for the junior and intermediate miners and explorers has significantly increased. That will soak up rigs in the market. We do have the ability to take advantage of that market and service that market with the rigs that we have. And again, I think gold is quite strong at the moment, as Nathan said, and should be strong for some time to come. And with our presence in Victoria and New South Wales, I certainly think we're very well positioned as a company to take advantage of that. In addition, the federal budget, the scheme that was announced in that federal budget will consequently have a positive impact on our free cash flow and will reduce our income tax liability. Worth noting that it will not have a profit and loss impact, but it will be a cash flow impact. The outlook on Page 14. Again, the pipeline of our opportunities remains strong. The demand from Tier 1 clients remains strong. They're producing their own operating mine sites. They're making good returns in their drilling. And the demand for gold, very strong, and gold as a percentage of revenue will increase in FY '21. No doubt about that. I think if you look at the business moving forward, it's probably looking at circa 50% gold or thereabouts plus/minus, depending on how things play out. We expect revenue and EBITDA to continue to grow, and looking at quarter 1 and the average operating rig count versus FY '20, we still expect that to be the case. Obviously, it's a Board decision and pending what's happening in the world and in markets, but the last couple of years, we've given our guidance with our half year numbers and post finalization of the half year that may be considered again. And we do have coverage in place from Morgans and previously had coverage in place with Wilsons, but the analyst left the organization, and Wilsons are seeking to replace that role. So in summary, it's Mitchell Services' vision to be Australia's leading provider of drilling services to exploration, mining and energy industries. We've got a diverse revenue stream working across different types of commodities, different types of drilling. We've got a very high-quality client base, and the majority of the work that we do is with those big clients on the low-cost side that operate through the cycle. We've achieved our guidance in FY '20, and I think that was a great effort from the team. And the special dividend, fully franked, now paid 2 years in a row, one during a pandemic. Again, I think that's a magnificent positive while debt's reducing. And lastly, we've got a strong balance sheet. It's really going to give us the opportunity to take advantage of opportunities as they come up. Looking at that Morgans coverage, they've got us in for a high 30s EBITDA in FY '21. And if you look at that versus current debt levels we're are in a very, very strong position from a leverage perspective. So just in closing, thanks very much to all of our teams and the support of our Board, our clients and our shareholders, and I'll hand back to Nathan to run through the formalities. Thank you.

Thanks, Andrew. Yes. I think that last page, the summary is we had another great year by the executive team and the management and the whole staff. I think it's a credit to you, guys, on such another good year growth-on-growth, which is great. And I couldn't be happy with what -- how the team is running the business. Okay. So we'll move on to the formal business of the meeting, and that is to consider matters requiring a resolution. As the notice of meeting, an exploratory memorandum has been circulated. I propose to take them as read. The notice of meeting also sets out the voting restrictions on each resolution. The first item of business is the consideration of the financial statements of the company, and the Corporation Act requires that the annual report of the directors, the auditor's report and the financial report be laid before the AGM, and those reports are hereby tabled. I now invite shareholders to comment or ask questions on the reports or the business of the company. Questions may also be asked of the auditors about the conduct of the audits in the audit report. Greg, the company Secretary, are there any questions on the financial statements of the company?

No questions on the financials, Nathan.

Excellent. Neither the Corporations Act nor the company's constitution requires a vote of the shareholders at the AGM on the financial statements and reports. We therefore move to consider the resolution at the meeting. All right. Resolution 1 is an ordinary resolution seeking shareholder approval to adopt the remuneration report, excuse me. Shareholders are asked to consider and, if in favor, pass the following resolution under Section 252 of the Corporations Act. The remuneration report for the financial year ended 30 June 2020 be adopted. The vote on this resolution is advisory only and does not bind the directors or the company. The proxy votes eligible to be voted on this resolution are displayed on your screen. The proxy votes received to date are as follows: 21.29% of the votes able to be cast for, 97.26%; against, 0.99%; abstain, 1.75%. Greg, are there any questions on the resolution 1?

There's no questions on resolution 1, Nathan.

Thank you. Please now select either for, against or abstain for the resolution 1 on your electronic voting card. [Voting]

We now move to resolution 2 an ordinary resolution, which is a vote for my reelection as a director of the company. As a matter of good governance, I will ask Neal O'Connor, Chairman of the Remuneration and Nomination Committee, to chair the meeting for this item of business. Thanks, Neal.

Thanks, Nathan. I'll now move to consider resolution 2, which is, as Nathan said, is an ordinary resolution. Shareholders are asked to consider and, if in favor, to pass the following resolution that Nathan Mitchell, who retires in accordance with Rule 5.1 of the company's constitution and, being eligible, offers himself for reelection, be reelected as a director of the company. The proxy votes that are eligible to be voted on this resolution are displayed on your screen. The proxy votes received today are as follows: proxies received, 49.88% of the votes are able to be cast, 99.25% for the resolution, we have 0.00% against the resolution and 0.75% abstaining. Greg, are there any questions on resolution 2?

There's no questions on resolution 2, Neal.

Okay, thank you. Shareholders, please now select either for, against or abstain for resolution 2 on your electronic voting card. [Voting]

And before we go to resolution 3, I'll ask Nathan to resume chair of the meeting.

Thanks, Neal. We'll now move to consider resolution 3, an ordinary resolution, which is to vote for Scott Tumbridge to be appointed as a director of the company. Shareholders are asked to consider and, if in favor, to pass the following resolution, that Scott Tumbridge, who was appointed as director of the company by the Board in accordance with Rule 8.1 of the company's constitution on 29 November 2019, be elected as a director of the company. The proxy votes that are eligible to be voted on this resolution are displayed on your screen. The proxy votes received to date are as follows: 49.88% of the votes are able to be cast. For the resolution, 97.87%; against, 1.21%; abstain, 0.92%. Greg, are there any questions on resolution 3?

No questions on resolution 3, Nathan.

Thanks, Greg. Can you now -- shareholders, can you now please select either for, against or abstain for resolution 3 on your electronic voting card? [Voting]

We now move to resolution 4, an ordinary resolution, which is to vote for Peter Hudson to be appointed as the Director of the company. Shareholders are asked to consider and, if in favor, to pass the following resolution, that Peter Hudson, who was appointed as Director of the company by the Board in accordance with Rule 8.1 of the company's constitution on 20 July 2020, be elected as a director of the company. The proxies that are eligible to be voted on this resolution are displayed on your screen, and the proxies received to date are as follows: 49.88% of the votes able to be cast; for, 98.75%; against, 0.32%; abstain, 0.92%. Greg, are there any questions about resolution 4?

No questions on resolution 4, Nathan.

Thanks, Greg. Shareholders, can you please select for, against or abstain for the resolution 4 on your electronic voting card? [Voting]

We now move to resolution 5, an ordinary resolution, which is a vote to increase nonexecutive directors' fees. Shareholders are asked to consider and, if in favor, to pass the following resolution, that for the purpose of listing Rules 10.17, Rule 42 of the company's constitution and for all other purposes, the maximum yearly aggregate sum payable of fees to nonexecutive directors of the company is increased by $100,000 from $350,000 to $450,000. The proxy votes that are eligible to be voted on this resolution are displayed on the screen. 21.62% of the votes able to be cast; for, 95.99%; against, 1.88%; abstain, 2.13%. Greg, any questions on resolution 5?

No questions on resolution 5, Nathan.

Thanks, Greg. Shareholders, please now select either for, against or abstain for resolution 5 on your electronic voting card. [Voting]

We now move to resolution 6, which is a special resolution that requires approval by at least 75% of the votes cast by shareholders entitled to vote on this resolution. The resolution is for the approval of an additional 10% placement capacity under Listing Rule 7.1a. Shareholders are asked to consider and, if in favor, pass the following resolution, that for the purpose of Listing Rule 7.1a and for all other purposes, shareholders approve the company having the additional capacity to issue equity securities up to 10% of the issued capital of the company at the time of issue, calculated in accordance with the formula prescribed by Listing Rule 7.1a.2 [ until earlier of ], one, the date that is 12 months from the date of this meeting; two, time and date of the company's next Annual General Meeting; and three, the time and date of shareholder approval of a transaction under listing Rule 11.1.1 or 11.2. The proxies that are eligible to be voted on this resolution are displayed on your screen. Today, the proxies received were 49.87% of the votes able to be cast; for, 97.48%; against, 1.6%; abstain, 0.92%. Greg, are there any questions on resolution 6?

No questions on resolution 6, Nathan.

Thanks, Greg. Please now select for, against or abstain for resolution 6 on your electronic voting card. [Voting]

Okay. That now concludes the formal part of the meeting. So shareholders, you're reminded that you can submit your votes online for a further 5 minutes after the closing of the meeting. The results of the poll will be announced to the ASX later today. Greg, are there any more questions online regarding general business?

So we've had 3 questions come through, Nathan, mainly in relation to capital management. First question is from shareholder, Mr. [ Christopher Lam ]. Christopher wants to know or Christopher says, "Thank you for the updates on operations. Is it fair to say that paying down debt and possible M&A activity has a higher priority for the Board versus paying dividends or initiating buybacks?"

Say that again, sorry.

Christopher wants to know, he says, "Thanks for the updates and operations." He wants to know, "Is it fair to say that paying down debt and possible M&A activity, the Board places a higher priority on those 2 things versus paying dividends or initiating buybacks?"

Well I think that the -- we look at all those things together. I think it's not one over the other. I think over the last couple of years, it's been prudent to look at both, paying down debt, but also looking at having enough funds to look at acquisitions. I don't think we're doing one or the other. I think we're doing both at the moment, and we'll continue to do both.

It's Neal O'Connor. I don't think a higher priority exists for any of them. Paying down debt is important to us, but as opportunities for potential M&A come across our desk, then we certainly will look at it. But I'm not sure that there's a higher priority of any one of them.

The next question comes from [ Mr. Glenn Risen ]. I hope I'm pronouncing that correctly. [ Glenn ] would like to know, "Given the acquisition of Deepcore, in November/December 2019, it's fairly difficult to compare like-for-like activities. Can you provide comparative details?" I'm probably happy to -- I'm happy to answer this one, I suppose, in capacity as CFO. I think during the quarterly updates that we give the market, we often referred -- or we always show the level of operating rigs. And as a general rule of thumb, the Deepcore business is operating on or about 30 rigs. So you could use that as a base, as a rule of thumb in terms of potentially working out like-for-like. Having said that, though, our integration strategies with all previous acquisitions has generally been integrate the business and, from that point, really just operate as one business and try not to pick it apart versus yet trying to show Radco distinct from MSV, distinct from Deepcore. So given current level of operations, rough rule of thumb, about 30 rigs of that total is Deepcore, and we'll just continue with the integration strategy as is.

I agree with that, Greg. I think our record so far with integration, the companies that we have done has been very good. And I think we've got a plan around integration, and to date, it's worked very well. I think that Deepcore integration, Deepcore acquisition has been very good for the company overall.

And a credit to the Deepcore team.

Yes. Very much so.

And the final question on general business also by [ Mr. Glenn Risen ]. "Would the Board be considering a formal dividend policy going forward?"

No, not at this stage. I think the market that we're in and resources, whilst we'd like to say yes, I don't think it's prudent for the company to -- so we'll continue to give money out every year.

That concludes the questions on general business item.

Thanks, Greg. All right. Being no further business, I'll now declare the Annual General Meeting closed. Thank you, everyone, and thank you to the Board for the last 12 months, it's been another fantastic result. I think we, and Andrew's executive management, we really appreciate the Board's tiresome work and strategic involvement in the company. It's been a very much a team effort for everyone and another good year hopefully ahead of us. So thank you, everyone. Thank you, shareholders, and thank you, everyone, for participating in today's first virtual meeting. I think it's a first for a lot of us, and it's something we're getting used to. Hopefully, we won't have to do it next year, but if we do, we know how to do it. Thank you, everyone.

Thank you.

Ladies and gentlemen, this concludes the Annual General Meeting. Thank you for your attendance. You may now disconnect.