Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the Mitchell Services Limited Full Year Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Andrew Elf, Chief Executive Officer for Mitchell Services Limited. Thank you. Please go ahead.

Yes. Thanks very much, Vincent, and welcome, everybody, and thanks for joining the call. I've got Nathan Mitchell, our Executive Chairman with me; and Greg Switala, our Chief Financial Officer and Company Secretary. We'll just take the disclaimer as read and go straight to Page 3, Mitchell Services Market Profile. So obviously, Mitchell Group there, Nathan, major holder, as is -- Dream Challenge is. Scott Tumbridge, Founder of Deepcore, which was acquired in late calendar year 2019. So a couple of founders in the businesses there. Obviously, that share count on the left-hand side there is just worth pointing out that that's current as at the 23rd of the 8th, and it will obviously change over the course of the next month or so as our capital raise process completes. On Page 4, again, it's been a very good year for us from a safety perspective. We've implemented a critical risk management program. It's been very successful, and no major life-changing injuries or fatalities in the business for the year. COVID-19, well, everyone has probably heard enough about that, but it's been tough for us. But we've been deemed essential, and we're thankful for that. And certainly, to [ our people who have got it tough ] and spend extra time away, we can't thank them enough. And we'll probably talk to that more as we go through the presentations. On 5, the overview of the business. Everything is sort of heading in the right direction in many ways. Shifts up, revenue up, debt down, underlying EBITDA slightly up on the previous year. Safety, I've spoken about being positive. And again, Greg will present financial slides as we move through the presentation. On Slide 6, and again, this slide was in our capital raise presentation. We're really saying here that from '14 to '19, we've repositioned the fleet in the business. We've taken our opportunities through the cycle as they've come to us. And we've been very disciplined with our tendering, and we've grown EBITDA and our Tier 1 client contract book over time. We've said to people that our surface rigs are out there and currently being deployed. And we're in a very strong position heading into FY '22 and beyond to take advantage of the further leverage that does exist within this business. And we'll talk to that as we go through the presentation as well. On Slide 7, we've got a breakdown of the quality of the revenue and the diversity of the revenue. You can see on the top right-hand side there that the split by drilling and -- surface and underground, roughly 50-50 forecast in the current year. And obviously, we've sort of moved that from predominantly surface to be a good balance. On the left-hand side, revenue mix by commodity and by region. And again, we've got a good exposure to gold and other base metals. And that sector is certainly experiencing strong demand and will continue to grow. And importantly, down the bottom right-hand corner, you can see the increase in that Tier 1 client revenue forecast FY '22 to move back above 90% or thereabouts. Now just on the organic growth strategy, that was predominantly the reason behind the capital raise there. So I might just take the opportunity to let Nathan talk to his views on that and why we're doing what we're doing and where to for you a little bit.

Thanks, Andrew, and thanks, everyone on the line. Firstly, I want to thank Andrew and the team. It's been a very tough year for the business in general. Obviously, we've had a few hiccups along the way, the SMS and the COVID. And -- but suffice to say, the company is still going forward, which I think is a real credit to the business. Unfortunately, the share price hasn't gone with it. But overall, I think the business has done well in a very trying time. The organic growth strategy, as everyone knows, we're doing a capital raise at the moment. And that's really on the basis that there's a -- there was significant growth in the business coming in the next few years. And whilst we had the concept to sell off some of our early rigs that we had purchased during the acquisition of Nitro, those rigs are still in high demand. They're still commanding very good rates. And we believe it was in the interest of the business to sell those and sell those to our competitors. So instead of actually swapping out equipment, we've decided to move forward and grow the business based on the last 5 years of growth. And so these rigs are obviously new technology, latest technology. And we -- in line with our business strategy of being a Tier 1 contractor, we've decided to essentially buy these [ 2 ] rigs. On top of that, the ATO's instant write-off, obviously, it was a large incentive for us to do that and take advantage of that. And so I can see a real future in the next 12 months and growth. As I say, we've had our issues, but most of those now are behind us, and hopefully COVID is coming towards an end. So the growth strategy is, I believe, the right move for the company going forward.

And we outlined now on that page, too, it's the first time that the company has given guidance at this time of the year. Traditionally, we've given out guidance when we release our half year results in February. And I think that talks to the strength of the market and the quality of the business that we're willing to come out and give revenue and EBITDA guidance in FY '22 at this time. And the last point on that slide, I think it's important, too, as Nathan alluded to, that we're going to have a very, very good fleet. At the end of August, we already have a very good fleet, and it's certainly going to have the capacity to do a lot more than $40 million to $44 million in due course on a lot of those rigs that we only have for part of the year, get the opportunity to trade for a full year. On Slide 9, I mentioned the opportunity to leverage the cycle. Obviously, we've got -- the demand is in our favor. Commodity prices are up. Rig utilization is high. There's been government stimulus in place. We've got tax incentives in place. Capital markets are strong. The list goes on. So we're certainly in a very good position from a demand perspective. And as you can see, just down the bottom of that slide there, the outlook is -- as far as we're concerned, is the strongest that we've seen in quite some time. And again, those rigs that we've ordered and are being delivered are coming on at the right time. We're starting to get our deliveries in August, September, and that's around about the time that the last of our current surface rigs are being deployed. On 10, on the supply side, so as well as demand, we've got the supply side in our favor. Access to funding is tough for new providers and even for existing providers, some people that have limited appetite for lending money to the sector as well. It's a complex and highly regulated industry with red tape and green tape, and that's only going to get worse, not better, you would think. So those that are already in a position, again, that creates a barrier. The lead time for rigs is flowing out all the time. Those rigs that Nathan spoke to, the last couple that we're waiting on, they've been delayed, and some of that's due to COVID supply chain challenges. So again, people that want to expand and grow their businesses are going to find it hard to do so. We started talking to the supplier about delivery of those rigs last year, and we committed to the rigs earlier in this year. And we're only taking delivery of them late this year and into next year. So the lead times are flowing out. There's been a significant level of industry consolidation. And you have the big companies that Mitchell have picked up over time, that DDH have picked up and others have exited the industry. I think the competitive profile of the market is in a much better shape than it has been in a long time. And obviously, from a labor perspective, it's tough to start up and attract and retain people. But as a business, I think we've had some really good things that we've done and have mitigated those risks. Good gear, good contracts, great clients, people in good camps and things like that. So it's certainly for us something that we're seeing as we play out our organic growth. And just an interesting anecdote on the bottom of Slide 10 regarding drill rods. And again, just to talk to the tightness of the market and especially supply chain, too, that we've got forward orders in for drill rigs -- sorry, for drill rods over the next 6 months or so. And again, that's representing 30% or thereabouts of a major supplier's total supply to Asia Pacific. So certain suppliers now aren't selling [ rods ] to new customers or selling to existing customers. Smaller customers are being scaled back. Obviously, our relationships and size hold us in good stead, but interested to see where it goes from here.

Looking at the profit and loss on 11 and noting that numbers are underlying, both revenue and EBITDA have continued to grow whilst underlying EBIT and NPAT margins have remained solid. As Andrew mentioned earlier, we expect to generate FY '22 EBITDA of between $40 million and $44 million, which at an underlying level would represent annual growth of approximately 18% compared to FY '21. Slide 12, looking at the balance sheet. We make the point that the business is well funded whilst embarking on its organic growth strategy that will include a material capital investment program. This program will be funded through a combination of equipment finance, proceeds from the equity raising and operating cash flows. From a cash flow perspective on Slide 13, it's worth noting that despite the $6.6 million trade receivable impairment, cash generated from operations, pretax and interest grew marginally from FY '20 levels, demonstrating a strong cash conversion within the business. Post interest and income tax payments, cash flows from operating activities were $30.1 million and were primarily used within the business to fund capital expenditure whilst at the same time reducing overall debt. Gross debt at year-end per Slide 14 has decreased by approximately 25% since last year. The group's drawn debt at year-end comprised $19 million in equipment finance and $11 million corporate market loan. The ratio of the group's net debt to 12 months rolling EBITDA is approximately 1x, and we expect the level of leverage to remain approximately the same by the end of FY '22. As mentioned earlier, the capital investment program will be funded through a combination of the proceeds from the equity raising, operating cash flows and equipment finance, which post the completion of the raise will be expanded to have a $30 million facility limit. Looking at CapEx on 15. We generally forecast maintenance CapEx to track in line with P&L depreciation multiplied by current utilization levels. Maintenance CapEx as a percentage of depreciation was circa 60%, with rig utilization levels in FY '21 of approximately 70%. Growth CapEx related to new rigs and equipment required to either service new or extended contracts as well as CapEx incurred in the early stages of the organic capital investment program. Importantly, as both Nathan and Andrew have alluded to earlier, the timing of this program will allow the business to take advantage of the cash flow benefits, albeit a temporary one, associated with our ATO's instant asset write-off allowance anticipated to be in place until June 2023.

Thanks, Greg. And just on the summary slide on 16. As I spoke about earlier, the supply and demand sides are in our favor. I think we're very well positioned as a business to take advantage of the leverage that exists within the business and to see that play out as we continue moving forward. I think we've got an excellent team and thank Nathan for his kind words. And I think we're certainly going to deliver on that organic growth strategy. There -- you can see there in the summary and as I mentioned it before, we've given EBITDA guidance for FY '22 of $40 million to $44 million. And certainly, the fleet has the capacity to generate more than that and then more than that again if the market gets stronger or additional leverage plays out. So that's the end of the formal presentation. There's a couple of supplementary slides, but we won't run through those. But we're happy to take any questions from people that they'd like to ask. Thank you.

[Operator Instructions] Your first question comes from the line of [ Jeffrey Thomas ] from [ Longbon ].

I was interested to know what's happening with staffing and automation in this industry and particularly in relationship to yourself. I understand there's a tremendous demand for staffing in many areas, and I just wonder what impacts it's having. And how are you going to handle this in the future?

Do you want to talk to automation?

Sure. Thanks, [ Jeffrey ]. Part of the reason for the purchase of the new rigs, [ Jeffrey ], is these rigs have automation in them, have hands-free operations, which our clients and certainly our Tier 1s are demanding now. And whilst we're still upgrading our older fleet, which a number of other contractors are, to become hands-free and automated, the newer rigs are certainly heading in that direction. So that's probably one of the main drivers for us to do what we're doing. And also it alleviates some of the issues around the training and the skill shortage that we're seeing. We're sort of semi protected at the moment on the skill shortage with the COVID barriers around Western Australia. It just means that Queenslanders are staying in Queensland, and Victorians are staying in Victoria, and WA-ers are staying in WA. But obviously, in the future, that will change. And it's certainly our position to have the right rigs and the right equipment so we can attract the right people.

And again, being a larger business, sort of we've got pretty sophisticated training systems. We can develop our own people rapidly. And as Nathan said, those rigs, you've got smaller crews. It also opens up opportunities for additional diversity and getting more people into the industry as well. So there's a range of things. But again, if you -- the important thing is the quality of the contract book. If you think about the guys and ladies that we've got working for us, it's obviously long-term contracts, good gear, good clients, good camps, good food, those sort of things and not a one-drill hole job and sort of [ bush ] sleeping in a swag under a tree, I think some people want more than that these days. So certainly, we've got a lot to offer people to come and join us and to stay with us.

Okay. What about -- did you mention something about overseas in this presentation or not?

None.

None.

None that we see.

Okay. No, I just get nervous about overseas. And the other thing was just in terms of, okay, we've got -- we're in a sweet spot at the moment, which feels like it's going to go on for a few -- a couple of years. What's the vision, say, within 5 years? When we start finding things are turning down, how is that going to be handled? We're just going to be left with a whole lot of rigs that nobody wants and depreciating assets? Or what's the plan for the 5 -- beyond this next sort of good period?

[ Jeffrey ], it's hard -- it's crystal ball, but we've been going for 50 years now. So I'm hoping that we go for another 50. I don't see the resources sector winding out. I suppose we're all crystal-balling about coal and what's going to happen to coal. But as you can see by our numbers, coal's a reducing part of our business. So still a profitable part of our business, and we continue to stay in that part of the business, but I can't see resources changing in the future. And I believe you've seen the debt reduction, and our position is to try and reduce the debt as quickly as possible to take advantage of the prices and the growth currently we're seeing in the cycle. But ideally, we aren't slowing down in 5 years' time.

We're not slowing down in 5 years' time, you don't see that?

Well, it hasn't so far. We've -- as I say, we've -- I've been around for 32-odd years, 34-odd years, and the company has been around for 50 years. We've never really slowed down. I think even when the business -- as you see in one of the early slides there, when we first came back in the business, it was pretty much the GFC of the mining sector in '14 and '15 and '16. We were still able to dig ourselves out of that. So I think we've got a pretty good record of being able to run this business. It doesn't matter what cycle we're in.

Yes. Okay. And just with this pricing, as contracts being a little bit more generous now in terms of being -- the pricing, if things are short, then maybe you can get a bit more profits out of your contracts in that. Is that a possibility?

Yes. We're starting to get price increases now finally. It's obviously been a long time coming. But again, it depends on the client. If it's a multi-rig, multiyear job with a large Tier 1 client, we're getting price increases that are more modest. And if it's a small short job with a much smaller client, you're getting bigger increases. But certainly, we are getting the increases. And again, that's important for us, and it is heading in the right direction and is busy. That's for sure.

Thank you for the support. I went to the Noosa -- I'm down in Melbourne. I went to the Noosa conference, and people up there were very helpful, and it was a good [ circumstance ]. So I want to thank you for that, and wish you all the best for the next couple of years.

Appreciate it. Thanks, [ Jeffrey ].

Yes. Thank you. I remember seeing you up there, so yes, nice to hear from you.

And your next question today comes from the line of Nick Robison from Jarden.

Are you able to hear me okay?

Yes, Nick.

Yes. So I just wanted to sort of get -- I'm not asking for guidance for fiscal '23. But obviously, you're buying a bunch of rigs. They arrive around start of the second half. It will take you a little while to deploy those rigs that you're saying basically that they are contracted as soon as they land and you've got them out in the field. So could you maybe talk us through a little bit how the EBITDA guidance evolves sort of between 1 half, 2 half? And it would kind of imply your exit run rate into fiscal '23, everything being -- as you see it now, would be much higher than the $41 million to $44 million EBITDA guidance that you've given for fiscal '22 given you're going to be ramping through the whole year. But if nothing changes, what kind of annualized run rate would you actually be coming out of the second half year?